HOW TO PROTECT YOURSELF FROM INFLATION.

Volker Heun

I

    n any case, investors should arm themselves against it,
    because a high inflation rate will certainly be with us
    for another 10 years, in my estimation.
There are two main reasons for the current inflation. On the one hand, due to the historically high indebtedness of almost all countries, interest rates cannot be raised as they should be. On the other hand, the situation in Ukraine is incalculable. Within a short period of time, energy prices have already skyrocketed; just two weeks after the start of the war, natural gas is 60 percent more expensive than it was in February 2022. As already mentioned, we should be prepared for a high inflation rate for a long time to come, which makes it all the more important to adjust one‘s investment strategy accordingly. The priority should be diversification of tangible assets.

One thing is certain, even in uncertain times: first and foremost, tangible assets help against higher inflation. These include shares, real estate, commodities and gold. Here, everyone should check what proportion of the portfolio is made up of tangible assets. With a share of less than 30 percent, even conservative investors have too few tangible assets in their portfolio when it comes to inflation protection. All other investors can easily tolerate a higher share of tangible assets.

The good thing is: one can invest in almost all tangible assets in the form of shares, ETFs or actively managed funds, whereby funds and ETFs have a broad diversification in themselves. In doing so, one should not fall into the mistake that thousands of new shareholders are currently making. They are mainly betting on current trends and buying themes such as new energy, gaming and blockchain, which could be high tomorrow and significantly lower the day after. This is more speculation than investment and should only make up a small part of the investment.

Let‘s take a look at equities. The basis of an equity portfolio should always be the broad global market, which is best represented in an intelligently structured way, with a share of 50 to 80 percent. Investors can use various instruments to supplement this large core with regions and themes where they see particular opportunities. This is also the method to make one‘s own assets inflation-proof.

Real estate has always proven to be a good complement or alternative, as it has been the only asset class to generate returns above the inflation rate for most of the past 50 years. It is therefore no coincidence that real estate has long been popularly referred to as „concrete gold“.

Gold and precious metals were predominantly important parts of a portfolio in the past and will certainly remain so in the future. A key aspect here is the finite nature of these commodities, which creates a scarcity that in turn makes inflation seem impossible. If we imagine all the gold in the world, it makes a cube with an edge length of just 20 metres! It is important to hold gold in smaller denominations to ensure flexibility. In principle, gold should be kept independent of banks.

This development is also currently attracting a lot of interest. Investing in things under an aesthetic aspect that one enjoys, for example art or vintage cars. More and more people enjoy a beautiful painting that they can look at every day in their home – for many this is more attractive than a share in analogue or digital form that is stored „somewhere“.

Speaking of art assets, NFTs (Non-Fungible Tokens) were certainly one of the trends in 2021 and NFT art in particular was always in the headlines. First celebrities are getting involved with the trend and some artworks were sold at auctions for record prices. Already, NFT is seen as a great opportunity for the art market, but it also offers opportunities for investors. NFTs are closely linked to cryptocurrencies and the blockchain and are not as new as one might think. Digital art has also been around for a while. The origins of NFTs date back to 2013 and the market could continue to grow in the future. In the first quarter of 2021, ten per cent of international sales in the art market already came from NFT art. In the first six months of the year, $2.5 billion worth of NFTs were sold around the world.

In general, it is safer to work with different banks, family offices or asset managers and always keep an eye on the costs. It makes sense to have a low monthly fixed fee, which is supplemented by a performance fee, then the asset manager also has a vested interest in earning real money. In addition, one should invest in different currencies and, above all, also use banks in other countries (this must, however, be reported to the German tax authorities!), because here, too, it is important to keep an eye on risk diversification for security reasons.

Speaking of security, investors should be aware that only 100,000 euros per saver and bank are protected by the statutory deposit guarantee. In special cases there is protection up to 500,000. Institutions such as Deutsche Bank or the savings banks are systemically important and will probably be bailed out by the state in an emergency, as was recently the case with Commerzbank. Nevertheless, any alleged damage should be kept to a minimum.

Always make sure that liquidity beats profitability: cash is king, despite inflation. Remember that you always need to access your assets in order to be able to react quickly to challenges.

If you take all these aspects into account, keep calm, acquire know-how about investments, stick to demonstrably competent advisors and thus develop a sense of what works and what doesn‘t, you will be able to stand up to inflation even in difficult times.

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