Hi Guys, Welcome to Episode 4 of my Little Saves podcast on Personal Finance. Today I am going to be talking a lot about Inflation. What inflation is all about. Why it sucks if you are an investor and how to plan your investments better keeping inflation in mind. I also have a very inspirational message on investments from Warren Buffet for you on managing money.
What is Inflation? Inflation is an concept in economics that measures the purchasing power of money over a period of time. To give a simple example, your grandfather might have bought a lot of land for Rs.2000 50 years back, today, you need that much to take your family out for lunch. Maybe even more than 2000 bucks.
So Inflation says that as time goes by, the value of goods increase or decrease due to demand, cost, taxes, supply of money etc. In most countries, there is an increase, and this increase in the cost of goods, which results in lower purchasing power of money is called inflation.
Does that mean inflation is totally bad for you as an investor? Not quite. Inflation is good and bad. It all depends on where you stand. If you have an all cash or mostly cash investment portfolio, it is definitely bad news for you in the long run. But for those with commodities and real estate investment inflation works in their favor. Let’s look at another example, let’s say you own a piece of land and you bought it for Rs.1,00,000. With inflation, the value of this land will also gradually go up. Likewise, if you have gold, silver, who knows even a barrel of crude oil, the value of all of this will go up with time due to inflation.
Why does all this happen? Why does price of things go up or down? Well there are three major reasons that have a lot to do with inflation:
1.) Supply of cash
2.) Rise in Demand of goods
3.) Increased supply will
Now we come to the big question. How does inflation affect your investments and what you should do?
This is how this all ties back to you. For those of you who are planning for retirement or even just looking at investing for the long term this is very important. If you have an all cash and related investments in your portfolio, you will be deeply be impacted by the effects of inflation as time goes by. Gradually, you will be receiving returns which really are of very little value.
A portfolio that is all real estate, commodity etc may do well in terms of inflation, but will put you in a hard situation in the short run and also be a lot less liquid. So, look at balancing your investments keeping both short term and long term in mind.
Stocks that pay dividends, gold, silver, bonds that are indexed with inflation, real estate are all great ways of safe guarding yourself from inflation. Another great option is to look at multiple geo-graphies. If you have an option, but investing in more than one market or country, you are spreading your risks of inflation across two different country. So if one has bad inflation the other will
In one of his interviews, Warren Buffet makes a very powerful and resonating statement I just so love! He says, ““The stock market is designed to transfer money from the active to the patient.”. To repeat, according to Mr.Buffet, the stock market transfers money from those who are active to those who are patient. This is such an important piece of advice to consider during the current times.
We are all stuck at home mostly due to the COVID crisis. Phone is by our side and so much of time on our hands. So if you start day or intra-day trading you better pay attention. What Mr.Buffet means is that someone who is very active in the stock market and trying to make it big time in the stock market is bound to end up losing money. And that money is going to most likely flow to someone who systematically bought an investment and held on to it for a long time patiently. Think about it.
That’s it for today guys. Have a really good day! Ta-ta till I see you next time!
Read more about Inflation and other ideas to save money.