The current inflationary cycle, which is driving the increased costs of just about everything, is attributable to, among other variables, the ongoing pandemic brought on by the novel coronavirus. At the beginning of the pandemic, no one was spending money, at least not in any significant way, unsure of what would happen. Now that lockdowns have ended, citizens are understanding that COVID-19 is something they have to live with. The economy has also been freed up, so to say, and people have begun to spend again and travel, causing something of a bottleneck with very high demand for money. There is also the issue of the much-talked-about supply chain disruption caused by COVID, as well as the erratic foreign exchange rate. All these things have provided a perfect storm to bring on an aggressive kind of inflation in the short term.

But just how long this inflationary cycle will last no one can say with any degree of specificity. Still, taking steps to mitigate its impact on your savings makes good dollars and sense.

Diversify, diversify, diversify

We in this space have always been strong proponents of growing investments and not so much savings accounts. You can have a savings account with hundreds of thousands of dollars today earning a negligible interest rate, but remember, what a dollar can do today, it won’t be able to do in 10 years’ time due to inflation’s corrosive effects. To be honest, it may not be able to do that in two months. It’s important, therefore, to find strategies to hedge against inflation. Money set aside in a savings account is good for the short term. You can use it as an emergency fund, but once you have more than three to six months’ salary saved, you probably should consider moving some of the rest into investments with better potential for long-term growth.

A disciplined, and patient, investor can plan for inflation by investing in asset classes that outperform the market during inflationary climates. Generally speaking, equities have historically been some of the most effective investments at beating back inflation over the long term. But before contemplating this, you must be comfortable with your investments rising and falling in value over the period. Consider what your risk appetite is, first. The value of investments, and any potential from them, can fall in the same way that they can rise, and you may get back less than you invested.

Equities for inflation-busting rewards

As an asset class, equities can mainly be invested in via two ways: through direct investment by way of stocks or investment through mutual funds. In essence, an equity investment is money invested in a company listed on the stock exchange through the purchase of shares in that company, effectively giving you a stake in the company. Choose wisely; you don’t want to invest in a company that’s going nowhere, or one that’s beset by too many problems. In the same vein, don’t assume that past success with the company is a guarantee for future success.

Direct investments: In order to decide on what company will be best suited to your goal of maximising returns long-term, do thorough research on the company; get a hold of its financials. This is fairly easy to do if you get in the habit of reading the Jamaica Observer‘s business pages, which are a good resource tool for revealing the financial health of companies. Get in the habit of reading these pages and speaking to people who are knowledgeable on these matters, like a financial adviser who can help you to devise a portfolio to maximise investment opportunities.

Because of their propensity for high returns over time, equities are well-suited for younger people who typically can afford more equity exposure. If you are closer to retirement, however, bear in mind that your equity exposure becomes more and more of a risk if the value of the stocks you own declines. Again, if you are unsure, seek expert advice.

Mutual funds: These, meanwhile, are professionally managed investment funds that pool money from multiple investors to purchase securities. In other words, a mutual fund investor owns shares in a company whose primary business it is to buy shares in securities, other companies or even bonds. Unlike with the direct investor in stocks, the mutual fund investor doesn’t directly own stocks in the companies the fund buys. However, these investors share equally in the profits, or losses, of the fund’s total holdings. Which is where the “mutual” in its name comes from. If you are the kind of person who wants to control where you put your money yourself, these funds may not be the right fit for you because it’s the fund managers who buy the securities, with the aim of creating a diversified portfolio that will potentially provide protection against the impact of inflation.