Inflation is a word that is often used in articles and videos meant to spread fearmonger. In reality, it is normal when it is occurring in a controlled manner, and there are ways in which you can protect your investments.
How Do You Keep Up With Inflation?
The most popular thing that the vast majority of the population does is to keep their savings in a savings account. Sadly, savings accounts almost never offer an interest rate that is high enough to even match inflation. Keeping up with inflation requires you to find means by which you convert your liquidity or cash into assets that appreciate at the same rate or better than inflation.
A better option and just as safe is to invest your savings in government-issued bonds. These offer a better interest rate but it is still below the inflation rate. What matters is that your net worth depreciates at a much lower rate.
Out-performing the Inflation Rate
The only way to outperform the inflation rate and protect your net worth is to move away from safe investment instruments such as savings accounts and bonds. There is a certain degree of risk-taking that you must tolerate in order to not get crushed by the current inflation rates. The safest way to protect yourself against inflation and reduce risks as much as possible is to invest in index funds.
Investing in index funds is like investing in hundreds of companies at the same time. If a company underperforms, it is removed from the index while others may be added. Everything is managed for you and you do not have to do anything except to buy into the fund.
Historically speaking, the most popular index fund, the S&P 500, has returned an average of 10% per year since its inception in 1920. This return beats the inflation rate by a considerable margin. Not only are you protecting yourself against inflation but you are also increasing your wealth by investing in index funds.
What should be noted is that such an investment strategy should be looked at as a long-term investment. Just like inflation can fluctuate, so can the index fund. However, holding onto your investment for several years will compensate for the periods in which the index fund may go downwards.
Another option is to invest in individual stocks.
This is also a valid method of beating inflation. However, it requires more time to be allocated to research. You will need to manage your stock picks yourself if you want to beat inflation.
You will need to monitor your picks and constantly decide what you want to keep, sell or buy.