Can investing help safeguard your finances against inflation?
By Hassaan Khan, Head of the School of Digital Finance at Arden University
Inflation in the UK has been ominously high since the turn of the year, with signs that it is only set to increase over the rest of the year and, perhaps, well into next year too. However, there are a few strategies you can employ to at least keep pace with inflation, and sometimes even beat it.
It is important to remember that any investment strategy has to be carefully planned and implemented. No strategy is risk-free, and the volume of investment and the type of strategy chosen should depend on the individual’s net worth and risk tolerance.
Even though you don’t need a lot of money to get started, you shouldn’t start investing until you can afford to do so. If you have debts or other obligations, consider the impact investing will have on your monthly expenses before you start investing. You should also be ready to consider a number of factors, including whether the investment you’ll be making should be short or long-term, whether you want to manage your own investments or pay an advisor, or whether you want to actively manage your portfolio or have a more passive role.
Commodities that are traded are typically sorted into four categories: metal, energy, livestock and meat, and agricultural. For investors, commodities can be an important way to diversify their portfolios beyond traditional securities.
In the most basic sense, commodities are known to be risky investment propositions because their market (supply and demand) is impacted by uncertainties that are difficult or impossible to predict, such as unusual weather patterns, epidemics, and disasters both natural and human-made.
Many investors who are interested in entering the market for a particular commodity will invest in stocks of companies that are related to a commodity in some way. For example, investors interested in the oil industry can invest in oil drilling companies, refineries, tanker companies, or diversified oil companies. For those interested in the gold sector, some options to think about are purchasing stocks of mining companies, smelters, refineries, or any firm that deals with bullion.
- Using Stocks to Invest in Commodities
Stocks are typically considered less prone to volatile price swings than futures contracts. Stocks can be easier to buy, hold, trade, and track. Plus, it is possible to narrow investments to a particular sector. Of course, investors need to do some research to help ensure that a particular company is both a good investment and commodity play.
Investors can also purchase options on stocks. Similar to options on futures contracts, options on stocks require a smaller investment than buying stocks directly. So, while your risk when investing in a stock option may be limited to the cost of the option, the price movement of a commodity may not directly mirror the price movement of the stock of a company with a related investment.
Investing in real estate can be very lucrative but getting started requires a large amount of capital. That being said, if you do not have hundreds of thousands of dollars on hand, there are other options to invest in real estate without buying a physical property.
Other options include choosing to invest in a real estate focussed company, which often have more freedom to reinvest their profits in expansion, or in home construction. Remember that homebuilder performance can be highly correlated to the economy. When job growth is strong, people want to buy new homes. When the economy is sluggish, new home sales tend to fall.
Investing in shares is a way to set aside money while you are busy with life and have that money work for you so that you can fully reap the rewards of your labour in the future. Legendary investor Warren Buffett defines investing as “the process of laying out money now in the expectation of receiving more money in the future.
People new to investing who wish to gain experience trading without risking their money in the process may find that a stock market simulator is a valuable tool. There are a wide variety of trading simulators available which allow people to try out investing, without risking their hard-earned cash.
If you’re on a tight budget, meanwhile, you could try to invest just 1% of your salary into the retirement plan available to you at work. The truth is you probably wouldn’t miss a contribution that small.
Ultimately there are many ways to invest which can help your money to grow, even with the pressures of inflation. But finding the right one for you, your budget and risk tolerance is important if you are to make the correct decision for your personal finances.
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