Guest article by LaTisha D Styles, a finance graduate teaching young adults how to Manage Your Money Like a Banker at Financial Success for Young Adults. You can find more from her at www.FSYAonline.com.
Yes, it’s coming. That looming certainty. Rates will rise, prices will increase and milk will cost an arm and a leg. We are already seeing the beginning effects of it.
What causes it?
Too many dollars chasing too few goods. Remember that girl in school who always had three or four guys to choose from for Friday night dates? The guys went out of their way to do more and more extravagant stunts to impress her. Buying flowers, crushing the competition in football, tripping her when all else failed. You get the idea. Well that’s the same idea behind inflation. When the government prints more money, there is more inflation. Selling government bonds is one way that they print money and government spending is another way.
It’s Inflation. Yes there are ways to prepare for inflation by stocking up on essentials, but what about your portfolio? How do you inflation proof your portfolio? There are two really easy ways to take advantage of inflation, especially if you are willing to take on a little risk.
Commodities like gold and silver benefit from inflation. That’s because smart investors know that these physical commodities will hold their store of value. I have a friend that buys silver bars regularly. When the recession hit in 2008 and once things eased up a bit in 2010, he sold them for a nice profit.
The price of gold has been steadily rising. At GoldPrice.org, you can see the price of gold in dollars per ounce since 1971. During times of recession, the price of gold increased. In the 80′s, it hit a high but the recent “Great Recession” created fresh highs in the price of gold. No one knows when the price of gold will begin to drop, but I do know that when I see the next bubble burst, I will be ready to buy.
Buy and Sell Currency
When banks print money, i.e. make loans, they are causing the value of their currency to fluctuate. The federal reserve controls the fiscal policy and the incentive behind printing money by changing the discount rate. Banks print more and more money and you can benefit from the fiscal policy changes caused by inflation by trading currency.
Despite the negative connotations that surround the foreign exchange market, it’s one of the last places that small investors can still trade. There are accounts that allow you to get started trading for as little as $25 dollars. There are no trading fees besides the spread. For these reasons more and more investors are beginning to see the foreign exchange market as a viable investment vehicle.
If you expect inflation in the U.S. Dollar, for example, and you think the Australian Dollar will be stronger, then you would buy the Australian Dollar and sell the U.S. Dollar.
Both of these strategies are high risk for investors without knowledge of the commodity and forex markets so you should learn more about each of them before you make any decisions for your portfolio. As always, consult your financial advisor before making any decisions.
Barb’s remarks; This is an extremely advanced strategy and should only be practiced with money you can afford to lose. Real estate is also a hedge against inflation. Buying non-perishable items in bulk when on sale can not be underestimated. Consider generics instead of name brands for all of your shopping needs. That includes store brands in the department stores as well as the grocery.
What did I miss? Do you have an investing strategy for inflation?