Choosing The Right Investment During High Inflation

Choosing The Right Investment During High Inflation

Choosing the right investment type and strategy

Do you want to know more about choosing the right investment during high inflation? There are numerous types of investments an individual can make however not all investments are created equally. Some investment plans carry a lot of risks but reap greater rewards, and there are safer investment options that generate lower returns.

Investing 101

Risk

Choosing the right investment bears a lot of risk. What you invest in is completely up to you, however, your portfolio should at least reflect your risk tolerance. Understanding your risk profile from the get-go will help you better plan the right types of investments for you – this can be considered rule number 1.

Affordability

It’s massively important to know how much you can afford to invest over a certain time frame, whether that be weekly, monthly, or yearly spending. It is vital to work out costs and understand exactly what you can afford.

Timelines & goals

Break down when you would like to achieve certain goals and stick to a plan when you are choosing the right investment during high inflation. Breaking down a business plan into bitesize, manageable pieces will help you better achieve your goals whilst giving much-needed motivation to achieve more. Setting goals and using timelines help to paint a clearer picture and help to reduce stress.

Professional help

Consulting with professionals is a good place to start when setting up a business or seeking to invest. Outside help from companies that offer such services will consult with you on your goals, when you want to achieve them, and the purpose for investing, such as aiming to retire, saving up for a new house, or looking at expanding a property portfolio. 

Some of the most common investment types are as follows.

High-interest savings account

This is one of the safest ways to invest your money because there is no volatility. By placing your money in a HISA, you’re earning annual interest on your deposited monies. A typical savings account offers little to no interest at all circa 0.1% while a HISA will generate around 1.3%.

These aren’t mind-blowing numbers, yet they are a safe bet, and you are guaranteed the deposited amount plus at least 1.3%* in interest. Based on 1.3%, $10,000 in deposits would generate $130 in annual interest.

CD Investments

The second safest investment to invest in are CDs. CDs provide a higher interest rate than a savings account, once cash is deposited you can’t touch the principal or interest until maturity. 

CDs are offered at 1-year, 3-year, and 5-year rates. Each bank will provide different terms. 

Real estate 

This investment requires a lot of capital but is a very worthwhile investment and extremely popular. Flipping property and renting property are the two most common types of real estate investing.

Real estate investing carries 2 main benefits:

  1. Earning passive income every month
  2. Your tenants pay off your house for you

Rental investing is complex and requires proper research. Outside consultants can help you better understand laws, taxes, and risks – so outside help is always advised.

real estate outlook 2022

Stock

Stocks can carry risk and is a more ‘hands-on’ investment that requires monitoring and analysis of a company’s performance. If a company wants to generate some quick cash, it can sell stocks to investors to generate liquidity.

When a shareholder purchases a stock, they’re entitled to a portion of the company’s earnings. Shares of stocks depend on the company’s performance and its projected future earnings. Stocks require a lot of research and could be considered a better option for more experienced investors.

Index Funds

These funds can provide high returns and diversified portfolios that mirror the movements of such index. These can be less risky than just investing in one single stock. According to MSN, the best index funds for 2022 are:

1-Vanguard 500 Index Fund Admiral Shares-Return 13.62, mirrors the performance of the S&P 500.

2-Fidelity Nasdaq Composite Index Fund- average return 16.21%

3- Fidelity 500 Index Fund: Return 13.65%, investments the majority in S&P 500.1

Index funds we found appealing to invest in: 

1-Vanguard Total Stock Market: Return 17.99%, well-diversified portfolio, mirrors the performance of the S&P 500.

2-Vanguard Growth Index: Return 24.58, a lot risker, portfolio of large-cap U.S. stocks

3-Vanguard Total Bond Market: Return 9.25%

How does inflation affect investments?

Currently, we are experiencing high inflation, so how can this affect our decision? Inflation in theory affects the value of our purchasing power as consumers. Then to mitigate the inflation factor, a higher interest rate is needed to deliver higher returns and capital growth. 

  • A savings account does not provide an interest rate that is high enough to offset the inflation factor. 
  • A CD does not offer a high-interest rate to mitigate the inflation factor unless the inflation is less than 3%, Which in this case the benefit of the investment will be offset by the inflation factor. 
  • Inflation increases the value of real estate assets. 
  • Stocks may fluctuate depending if the companies are in the cyclical or noncyclical industries. 
  • Index Funds can offset some of the inflation, as these are well-diversified portfolios of stocks. 

So what now?

Startup Tandem advises you to assess your personal risk, and financial health before investing. Do the research needed to make a proper decision. Making an account with a broker or consulting with a financial advisor can help you achieve your long-term financial goals. This type of individual can help you invest your money in a certain investment that can provide you with extra income for day-to-day activities. 

Startup Tandem does not provide financial advice to individuals on personal investments. Brokers can give you crucial advice on the right sort of investments to suit your financial position and investment goals.

What does this mean for small businesses?

Small business owners should try to maintain healthy cash balances to navigate the current market conditions. As interest rates continue to rise, the cost to borrow will increase making it challenging for small business to meet their lending terms. This also means being smart at placing purchase orders for equipment, inventory, or any other materials. 

Startup Tandem can help you create a short-term strategy for businesses to navigate the uncertainty of the current market conditions and reassess periodically. Now is the time to ask for help, if your business is suffering.

This article is solely for educational purposes. Nothing in this article is meant to persuade or advise anyone on what to do with their money. Please consult with an experienced broker or financial advisor before making any decision. 

Sources:

1- Barbara Friedberg. May 23, 2022. “9 Best Index Funds for 2022” Retrieved on 8/1/2022. 

 9 Best Index Funds for 2022 (msn.com)

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