How to protect yourself from inflation and rising interest rates

It is not new, and we have already commented on the blog, that inflation is weighing down the economy and the pockets of consumers. We see it on television, we hear it on the radio, we find it in supermarkets, gas stations, and in conversations with neighbors. In addition, and with the aim of counteracting the effects of inflation, the central banks of almost the entire world are beginning and raising interest rates. Assuming that what is happening is inevitable, our question should be, “how to protect against inflation?”

Let's dedicate this article to the current hot topic of price increases, and see What can we do about it to protect us. What ideas can we find, and also find out what options we have if, on the contrary, we believe that this is going to be temporary.

Fixed Income, the least fixed income

The funds that invest in both fixed and variable income are showing losses these months. Depending on your investment style, there are some exceptions that have been positive, but it has not been the usual. Mainly the worst part has been taken by the Funds destined for Fixed Income, considered an investment for conservatives.

Note that when I say that they have taken the worst part, I am not referring so much to the percentage of losses, but to the losses in relation to the little benefit that they could offer.

At this point, it is worth reflecting and thinking what position can we take based on how we think interest rates and bonds are going to perform in the future. There are basically 3 things that can happen:

1. That the interest of the bonds remain stable. Currently very few analysts consider this scenario. More considering, for example, that banks such as the ECB have already announced that they will reduce the pace of debt purchases.
2. That the interest of the bonds and the Euribor go down. A scenario that is still less possible. Among others because with inflation on the free rise, what is least contemplated is stimulating consumption.
3. Let the rate hikes continue. The current scenario that we are seeing and most likely to continue to occur, also contemplated by most analysts.

How to act against the performance of Fixed Income according to your forecasts?

If you are one of those who believes that the worst is over, without a doubt the best option would be to buy bonds. Either directly, and/or through a Fixed Income fund dedicated to said management. It is not something that I personally recommend, in fact I see very very low rates due to the high level of inflation that exists.

On the other hand, if you think that Fixed Income will continue to perform poorly, it would be advisable to start with not investing or minimizing positions. There is also the possibility of buying PUTs referenced to an ETF with exposure to bonds. And of course, there is always the option of buying inflation-linked bonds.

Variable Income, how to protect yourself from inflation with shares

As the cost of raw materials rises, many companies must raise the price of their products or services. This causes the disposable income of consumers to suffer, due to the loss of purchasing power. The best performing companies tend to be those of basic products in times of uncertainty and inflation. An example, Coca-Cola. Those with the worst performance, the cyclical ones, for example the automobile ones.

Inflation produces a resentment in consumption, thus propitiating general declines in the stock market, in addition to uncertainty due to the Russian issue.

The markets may continue to fall. The difficult thing in bearish periods is to anticipate when they will end the falls. Therefore, selecting securities that are considered to be at a good price, or that will perform well, can be a good way to beat inflation with the potential return they can offer. It should be noted that it is not without risk, and the selection of securities that each investor can make will greatly determine the performance of each portfolio.

Real estate investments, the most conservative bets

It can be a double edged sword. Although in inflationary periods housing has tended to perform well, the real estate crisis showed us that prices can go down much. If the strength of the euro remains strong, wages show less variation than expected and price increases continue, an increase in interest rates could lower property prices. A lack of uninspired buyers would increase the stock of available homes.

In some countries like Germany, the alarms have already gone off due to the strong increases that housing is having. We must monitor these data, if it is a bubble, with a weak economy, it could affect other countries where the increases have been more moderate, such as Spain.

However, not everything is housing, and there are other properties such as land, premises or car parks where you can take refuge. In case they were rented, and there was an eventual currency devaluation, real estate investments would be a good option. And as always, if you don't have the capital available, there are funds, REITs and ETFs in the markets with exposure to this market to benefit from cheaper purchases, or potential future revaluations.

Commodities, security in how to protect yourself from inflation

If the price that is increasing the most is that of raw materials, why not protect yourself from inflation with them? We can invest through shares of companies that produce raw materials, ETFs that replicate the behavior of those that may be interesting, or go directly to the derivatives market. One of the favorite assets for many investors or people who want to preserve capital is gold. Beyond fighting inflation in the long run, there is a direct relationship between periods of uncertainty and gold.

Related article:

Gold Silver Ratio

The important thing in these cases is that each one must assume the risks that they are willing to take. And of course, you don't have to put all your eggs in one basket, it has always been interesting to diversify.

“Money is like manure. It's not good unless it spreads." Francis Bacon