If you think that the best solution at the moment is to keep your savings under the mattress in the hope of better times, you are wrong. Inflation is making your saved money lose value with each passing day. You will no longer buy with it today what you could have just a few months ago. So what can you do? You can invest your savings and try to minimise your losses. What is the best way to invest in 2023?
How does inflation affect the value of assets?
The impact of inflation on the economy and asset values can be unpredictable, but typically inflation is most damaging to the value of fixed-rate debt securities because it devalues both interest payments and principal repayments. If the inflation rate exceeds the interest rate after adjusting for inflation, lenders actually lose money. This is why investors sometimes focus on the real interest rate, obtained by subtracting the inflation rate from the nominal interest rate. Long-term fixed-rate debt is more exposed to the impact of inflation than short-term debt because its impact on the value of future repayments is correspondingly greater and builds up over time. In an inflationary environment, assets that can bring in more cash or increase in value as cash increases are best suited. Good examples are rental properties that are subject to periodic rent increases, or energy infrastructure where rates are linked to price levels.
How to protect your money from the effects of inflation?
The main recommendation that most experts point out to protect your money from the disastrous effects of inflation is to diversify your investment portfolio. In uncertain times, it is not worth putting everything on one card. Therefore, don’t invest everything in one idea or in the shares of a particular company and certainly don’t decide to put all your money in one place. The safest way out is to invest some of your money in multiple investments, for example a little in currencies, a little in Treasury bonds and the rest in raw materials. After an initial period in which there was a wave of general panic with sudden changes in variables including a rise in the price of gold, which reached undesirable levels, there has been a recovery. The diversification of a portfolio is an effective and loss-limiting strategy. A good investment portfolio should contain securities from different categories so that credit and interest rate risks are hedged. This allows investors to be proactive, maintaining a dynamic approach but avoiding setbacks due to high volatility. The ongoing period of intense inflation with a rapid pace of price rises combined with modest economic growth has led to the development of some strategies to protect against possible uncertainties. Due to their growth potential, equities are a good long-term hedge against inflation, especially if we focus on companies with growing purchasing power and a stable and forward-looking situation. Such companies are able to control costs to keep profit margins low or pass on price increases due to strong demand for their products. It is worth focusing on companies related to financial technology, which include the biotech, financial technology, cloud computing or online payments sectors, as well as green, fuel and natural resources companies. Treasury bonds, real estate and, for the more adventurous, cryptocurrencies and NFTs are good options for those wishing to provide financial security with little risk of loss.
What to invest in 2023?
A lot depends on how much risk you want to take and how much capital you have at your disposal. Nevertheless, it is also important what main objective you have set for your investment. Below, I cite some of the most commonly recommended investment opportunities by specialists.
Gold and silver
Buying gold has been a well-known way of investing for a very long time. This commodity is usually not subject to large price fluctuations, and in the long term its value almost always increases. It is therefore a fairly safe way to limit the decline in the value of your funds. It is therefore a fairly good method of ‘freezing’ your money for a long time. However, it is not very lucrative if you want to invest in the shorter term. In addition, its liquidity, i.e. the possibility of exchanging it for cash when needed, should also be taken into account. The second option is to invest in silver, whose value has been rising steadily in recent years due to the popularity of alternative forms of energy generation, such as photovoltaics. Experts predict that the upward trend for both of these precious metals is set to continue.
In a period of rising inflation, instead of storing money in savings accounts, many people choose to buy property. Investment in real estate is a popular choice as it becomes a more useful and popular means of storing value in an inflationary environment, while also generating increased rental income. Investors can buy real estate directly or invest in it by purchasing shares in REITs (Real Estate Investment Trusts). REITs are financial entities in the form of companies or funds listed on the WSE. Thanks to them, investors with smaller funds can invest them in commercial real estate.
Raw materials and commodities
When inflation rises, investors tend to turn to tangible assets that are most likely to gain in value. This was evident during the pandemic. You can invest in raw materials and agricultural products such as oil, food, copper, cotton or medical products. In an inflationary environment, commodity prices rise in line with the prices of the finished products made from them. Higher oil prices, for example, push up petrol and transport prices. Therefore, seasoned investors can trade in commodity futures or producer shares and gain when others lose. However, this is not an option for beginners.
In a difficult financial and political climate, placing money in foreign currencies is a very common way to invest. Investing in foreign currencies can be a great way to diversify an investment portfolio. Trading foreign currencies, is a little more complex than investing in stocks, mutual funds or hedging your investment strategy with bonds, but by taking some time to do it, you can make a lot of money. It requires a fair amount of skill and speed of decision-making, but you can make good money from it, and in a relatively short period of time. It is safest to invest in currencies such as pounds and euros, but investing in dollars can also bring some profit. If you are interested in buying currencies and want to start your adventure with investing in currencies, you can take advantage of Walutomat’s offer.
It is also worth investing in ETF (Exchange Traded Fund) units, i.e. open-ended funds listed on an exchange. They are distinguished, among other things, by the fact that you do not need to buy units, which undoubtedly gives you an advantage over other investments. They work in a similar way to mutual funds, with the difference that shares in ETFs are traded on an exchange. Good results can be achieved with the Finax platform, which allows capital building through a low monthly contribution.
Finally, something for the adventurous. Someone who is hoping for a lot of profit, but at the same time is aware of a lot of risk and is prepared to take losses. After the drastic falls of recent months, it is estimated that the cryptocurrency market is set to rise from the dead. The brightest future is forecast for the largest currencies of this type, namely Bitcoin, Binance Coin and Ethernum. However, the situation here is changing at a dizzying pace, so it is worth keeping your finger on the pulse and making quick decisions.