Inflation is one of the most important economic factors that affects everyone's financial life. Although we often talk about inflation in an abstract way, it has direct and real impacts, especially when it comes to investments and purchasing power. To protect your money and ensure that your investments grow in line with your financial goals, it is crucial to understand how inflation affects your assets and what strategies you can adopt to mitigate it.
In this article, we will explore how inflation affects your investments and present strategies to protect your assets against this economic phenomenon.
What is Inflation?
Inflation is the continuous increase in the prices of goods and services in an economy over a period of time. When inflation is high, the purchasing power of money decreases, meaning that you can buy fewer things for the same amount of money than you could before. This loss in the value of money affects everything in the economy, from food prices to the returns on your investments.
Inflation is measured by indexes such as the Consumer Price Index (CPI), which tracks price variations of a basket of goods and services. When prices increase, you feel that your salary, for example, does not have the same purchasing power as before.
How Does Inflation Affect Your Investments?
Inflation impacts your investments in several ways, both directly and indirectly. Let's look at the main effects:
1. Reduction in Real Return on Investments
Inflation reduces the real value of investment returns. For example, if you invest in an asset that offers a return of 5% per year, but inflation over the same period is 6%, the real return is negative, that is, you are losing purchasing power, even though your investment is “growing”. The true profitability is the difference between the nominal (gross) return and inflation.
2. Increase in Interest Rates
When inflation is high, central banks, such as the Central Bank of Brazil, usually increase the interest rates to try to control inflation. This happens because, by raising interest rates, consumption decreases, which can help to slow down the economy and reduce pressure on prices.
These changes in interest rates directly affect your investments. For example:
- Fixed Income Securities: High inflation leads the government to raise interest rates, which can make fixed-income securities more attractive as they become more profitable. On the other hand, this can reduce the market value of existing bonds, which pay lower interest rates.
- Actions: High inflation can reduce corporate profits, especially if they are unable to pass on the increased costs to consumers. This can negatively affect stock prices.
3. Increase in Operating Costs
In a scenario of high inflation, companies face rising production costs, such as raw materials, energy and wages. If a company is unable to pass these costs on to consumers, its profits can be squeezed, negatively affecting its shares and investors’ profitability.
4. Impact on the Real Estate Market
Inflation can also impact the real estate market. If inflation is high, construction costs increase, which can affect property values and the profitability of real estate investments. However, real estate can also serve as a inflation protection, as properties tend to appreciate over time, outpacing inflation in many cases.
How to Protect Your Money from Inflation?
While inflation is an economic reality that is difficult to avoid, there are several ways to protect your investments and assets. Here are some effective strategies:
1. Invest in Assets that Beat Inflation
To combat the loss of purchasing power, you should invest in assets that offer returns higher than inflation. Here are some options:
- Actions: The stock market has historically outperformed inflation over time, especially stocks of solid companies with strong cost-passing capabilities. Investing in stocks of companies in sectors such as technology and healthcare can be a good strategy.
- Real Estate Investment Funds (FIIs): Real estate funds are a good alternative, as properties tend to appreciate in value with inflation. In addition, many FIIs offer a monthly return, which can help combat the impact of inflation on your budget.
- IPCA Treasury: The IPCA+ Treasury is a federal government bond that pays a fixed rate plus inflation measured by the IPCA (Broad Consumer Price Index). This ensures that your return keeps up with inflation, providing protection for your investment.
2. Diversify your Investment Portfolio
Diversification is one of the best ways to protect your investments from inflation. By having an investment portfolio that combines different types of assets, you reduce risk and increase the chances that at least part of your portfolio will outperform inflation. Diversification can include a combination of fixed income, actions, real estate funds and commodities.
3. Investing in Commodities
Commodities, such as gold, oil and grains, are assets that tend to appreciate when inflation is high. Gold, in particular, is seen as a refuge against inflation, as it tends to have its value increased during periods of high inflation, functioning as a natural protection against the loss of purchasing power of money.
4. Taking Advantage of Investments Abroad
Investing abroad, in markets with lower inflation, can also be an effective strategy. In addition to diversifying your investments, you can protect yourself against local inflation. For example, by investing in shares of US companies or in debt securities with yields linked to the dollar, you can minimize the impacts of inflation in Brazil.
5. Periodically Adjust Your Portfolio
It is important to monitor the performance of your investments and adjust your portfolio based on inflation and market conditions. During periods of high inflation, you may want to allocate more resources to inflation-beating assets, such as stocks and IPCA-indexed bonds, and reduce exposure to low-return assets, such as certain fixed-income investments.
Conclusion
Inflation is an economic force that directly affects the purchasing power of your money and the returns on your investments. However, by adopting a smart and diversified investment strategy, you can protect your money from the erosion caused by inflation and even use it to your advantage. Investing in assets that outperform inflation, such as stocks, real estate funds and Treasury IPCA, in addition to diversifying and regularly monitoring your portfolio, are effective ways to ensure that your investments grow over time, despite inflationary pressures.
