|Inflation has caused a sharp increase in the price all products around the world, not just coffee. In the UK it seems we get clobbered even more!
The UK inflation rate may be officially stated whatever is the current rate but if you’ve followed my commentary, you’ll know about my distrust of the official numbers. Add on another 5-10% and you might get to a rate that’s closer to reality.
Don’t just take my word for it … ShadowStats is a US-based website run by veteran economist John Williams who has long campaigned against government manipulation of economic data. The website shows true inflation to be a lot higher.
Why Does it Matter? (besides having to overpay for coffee)
If holding excess cash, know that it’s eroding much faster than you might imagine.
Using just the official rate your cash will be worth 37% less, in real terms, in 5 years. After 10 years it will be worth 60% less. That’s a significant loss of future purchasing power.
Cash is the only major asset class guaranteed to lose real value on a daily basis. On the other hand, investing in real assets such as stocks and property has historically always kept up with the reality rate of inflation.
Why Stocks and ETFs keep up with Inflation …
When we buy stocks we are buying a share of a company and its profits. Remember, ETFs and Funds are just a diversified group of companies.
Stocks are a great beneficiary of inflation because company revenues and profits tend to grow with the rate of inflation, if not more.
For most companies it’s much more because they have operational leverage where costs are fixed but revenues rise with inflation – resulting in a turbo-charging of profits.
This goes a long way to explain why stockmarkets keep appreciating over time. Like now.
Let’s illustrate with some numbers.
Using a simple example, let’s say a company had £100k in revenues and £80k in costs. That results in profits of £20k.
Now, let’s assume there is 10% inflation across the board. So revenues rise to £110k and costs go up to £88k, resulting in a profit of £22k. i.e. 10% increase in profits
The reality may be much better because many costs are fixed in the medium term – eg rents, staff, leases, contracts. So many companies will enjoy an inflation-beating rise in profits.
As profits rise, share prices would also appreciate – all else being equal. Hence, equities tend to be a great hedge for inflation.
Take advantage of this and protect your wealth from inflation …
There are many globally diversified equity ETFs out there. Vanguard, iShares and SPDR are effective providers of low-cost global equity ETFs.
Ps: In our Self-Study Investment Academy programme we go through a detailed list of low-cost ETFs and their performance.
- Time in the Markets always beats timing the markets
- Stay Diversified
- Minimise those leakages: Fees, Inflation, and Taxes
- Financial Markets are a great source of recurring income
- ETFs, Balanced Funds and Options achieve all the above
- Being educated helps you outperform 99% of the population
… to ensure your investments work for YOUR financial freedom (not someone else’s)
For more guidance, our Investment Academy will help you implement all of this in a step-by-step way.
Thousands of people have learnt how to diversify and pound-cost-average into low-cost, set-and-forget ETFs & Funds for inflation-beating growth. And Options to create recurring income.
Click here to learn about our Investment Academy
– Don’t take the above as advice as it may not apply to you personally
– Your Capital is at Risk
– You may not be covered by the FSCS
– Anything mentioned in a podcast or in a previous article was valid at that time and may not continue to be now