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How to Protect Yourself from Inflation

Inflation is unfortunately an ugly reality we all have to deal with. Prices will realistically most likely keep going up every year until the day that we die, the only thing that will likely change from time to time is how quickly they are rising.

So what is the most practical to safeguard the purchasing power of the money you have worked so hard to earn? As always, there is no one fool proof way to address the issue, but several strategies you can take and each one has its own set of risks.

Property is generally one of the best bets against inflation. Over the long run, property will in fact usually make a positive return above and beyond inflation. However, there still exists timing issues and other risks which can never be 100 percent avoided. Take for instance Yangon commercial property at the moment. It has risen so fast, and there are so many projects under way, that one must wonder if today is a good time to buy in or if the gains form the expected boom are already priced in.

Of course only time will tell, but for me it is one of the most difficult real estate markets to get my head around. In some markets foreigners cannot legally own land, so the loopholes one must jump through add another layer of risk.

The stock market is also said to keep pace with inflation, and again while this is generally true, timing is always a huge factor involved in whether or not your investments actually do. One could make a strong argument that the expected inflation is already priced in at the moment, and in fact the efficient markets hypothesis taught in every finance program would say that this is the case. I am not a big fan of that theory in most instances, but at the moment I think this may be the case.

If real estate and the stock market cannot be guaranteed to keep you ahead of inflation, what about bonds? Here I see at the moment one of the few ways that you can be pretty sure you will beat inflation, but sadly it will not be by much. The other thing is that you need to buy individual bonds, preferably by companies with top credit ratings, and make sure you can hold them to maturity.

A bond fund, as I have written about many times, stands to lose when interest rates eventually break free and begin to rise. Commodities typically do well in an inflationary environment as well, but these can fall victim to the same boom and bust cycle that every other asset class goes through as well. As I wrote about last week, I do put gold into a portfolio most of the time but am very aware that the downside potential at the moment could be similar to that of the stock market.

As is usually the case with investing, the best way to try and stay ahead of inflation is to diversify across asset classes. The risks involved with each type of investment will not usually be realized simultaneously, so oversized gains in one area should help to offset any troubles in another part of a well-diversified net worth. Inflation will never go away, and we most likely will see some periods in the coming decades where prices rise very rapidly. If your assets are spread around you can be sure that some of them will catch this uplift and protect your overall purchasing power.

David Mayes MBA provides wealth management services to expatriates throughout Southeast Asia, focusing on UK Pension Transfers. He can be reached at david.m@faramond.com. Faramond UK is regulated by the FCA and provides advice on pensions and taxation.

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