How to protect our investments from inflation?

For a long time, experts have been predicting when inflation would finally reach the markets and this data confirms its presence. How could we defend our investments from its effects? Martin Tillier on

Inflation is an important part of building a portfolio. Cycles up or down were seen as normal and investors considered the negative effects of price increases on their portfolios. For a long time the Fed and other central banks are immersed in extremely low inflation. There is no guide to reversing this situation. The circumstances are not the same as in the 70s and the protection measures, therefore, are not the same either.

“To begin with, many of the things that would now be considered options to hedge against inflation did not exist at the time, and investors’ access to even those that did was severely limited,” says Tillier.

Rising consumer prices are a symptom of inflation, not the problem. These occur when the real value of the dollar falls, for more than the real value of things has not undergone changes. Purchases are exchanges and there are two factors that influence them:

Product value

The value of the coin

“If more dollars are needed to buy something than before, it is logical that the change occurs in the relative value that people assign not only to the purchased object, but also to the currency used to make the purchase,” says Tillier.

If the theory is real, then it would be convenient to buy another currency in which its purchasing power remains the same or increases as the dollar loses value. Before investment was directed towards Gold, today we also have cryptocurrencies.

In particular, the supply of Bitcoin is limited. So that its price and dollar value is pre-programmed to go up.

Bitcoin has the particularity of offer protection against the corrosive effects of QE and the massive expansion of federal debt. But it is not a hedge against inflation.

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“There has been so much speculation with cryptocurrencies in recent years that their role as a store of value is far more than valued at the moment. In a nutshell, Any asset that is more than 250% above its year-ago level has many price increases included. Clearly, other things are driving prices, and that means even If the CPI increases continue and the dollar loses value, there is no guarantee that bitcoin will be a beneficiary. In fact, the resulting economic weakness and monetary and fiscal tightening will mean less capital chasing assets, and that could lead to a tightening that would negatively impact assets like bitcoin, ”says Tillier.

The issue is not about defending ourselves with the usual gold, real estate, or raw materials. The system is so flooded with cash that investors were able to bid on these assets before inflation and invest large amounts in stocks or bonds. Consumer price inflation may be coming, but in financial markets it has been around for a long time.

“In those circumstances, Inflation protection is not so much about finding assets that will actually benefit from rising prices or a falling dollar, but about finding things that don’t lose value. That’s why the stocks of companies that can quickly pass on rising prices to their clients, such as those in the consumer staples sector, would be a better option, as would something else that was not available in the 1970s and 1980s. : Treasury Inflation Protected. Values ​​(TIPS)”Says Tillier.

TIPS are Treasury bonds that protect the principle of an investment by increasing its nominal value in line with the CPI and were launched in 1997. They are an extremely conservative investment option, with an accent on return on principle rather than return on principle, but there is a point here. Prices are rising and the price of most hedges has already skyrocketed, so there is too much risk to be a real hedge.

“This is not your grandfather’s inflation, so you can’t go back to the old inflation protection playbook. At current levels, things like gold, other commodities, and real estate don’t offer a reduction in risk, so if you’re worried and want to make changes, you need to get extremely conservative and stick with things like consumer staples and TIPS.. That may negatively affect your returns for a while, but it is an insurance policy worth considering, ”concludes Tillier.

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