This is how you protect your assets from a loss of purchasing power. Many investors fear rising inflation rates. But there are no patent remedies for protecting a depot against the loss of purchasing power. Nor is it a guarantee that the portfolio will develop as hoped in an emergency. In any case, it is not a good solution to shift all assets into stocks , gold , real estate and other tangible assets for fear of inflation. The risk of such a portfolio would be considerable. In addition, portfolios with a relatively large proportion of bonds and short-term fixed-term deposits achieved better returns in the past, even in periods of high inflation, with lower fluctuations in value than portfolios with a real asset ratio of close to 60 percent.
Short-term bonds were the best hedge against inflation
Other analyzes also show that investors with government bonds were able to maintain their purchasing power in the past. According to this, federal bonds with a remaining term of one year have offered the best protection against inflation in the short term since 1970. This is because their returns are the quickest to adjust to rising inflation rates. Investors usually ask for a higher interest rate when consumer prices rise. Federal bonds of all maturities have delivered an annual average return of 4 percent after deducting inflation since 1970. That is a decent result. In the early and late 1970s, when consumer prices rose at a rate of over 5 percent per year, their real returns fell to zero and 1.2 percent, respectively.
Only a look back shows how it went
How big the real loss of value is can only be determined in retrospect. Because the inflation rate relates to the past. It compares the current price level with the one twelve months ago. In contrast, the yield on a bond at the time of purchase indicates how high its future annual yield will be on average until maturity. This figure can also be misleading if the paper is not held until the end of the term. If it is sold beforehand, price gains or losses are possible, which lead to a higher or lower return. Investors therefore only know in retrospect whether their return was above the inflation rate.
The inflation protection deposit proposed here is not set in stone. In contrast to the guaranteed custody account , you can vary the weighting of individual asset classes according to your risk appetite. For example, if you don’t want to invest in gold , you can increase the equity component accordingly. The gold quota should generally not be more than 10 percent. You can increase the real estate share at the expense of the bonds . For the latter, there is a mix of different pension funds. Funds with inflation-linked bonds are also an option. However, their real returns have recently been negative.
The golden mean: interest rate strategies
If you do not have an opinion on the development of interest rates and for good reasons do not want to rely on the mostly false forecasts of others, then you should stagger your fixed-term deposits according to maturities.
Such a “stair strategy” protects you from getting caught on the wrong foot. Because if, for example, you bet on an imminent rise in interest rates with a high overnight rate and this does not happen, you will miss the higher interest rates of longer-term fixed-term deposits. If, on the other side, you concentrate your capital on the latter and interest rates rise sharply, you will not benefit from this development because you are committed to the longer term. The stair depot is a middle ground.
Example: With an inflation protection deposit over 100,000 dollars, the share of bank deposits would be 20,000 dollars. Divide the amount into four equal parts. You put part of it in a call money account. You distribute the rest between fixed deposits with terms of 1 to 3 years.
In this way, a fixed deposit is due every year. If you invest the money again with a term of three years, this rhythm continues. You can also increase the term if a phase of rising interest rates has not yet started. Longer terms of up to five years are particularly worthwhile if the interest rate differences between the terms are large. For example, if you get 2 percent for fixed deposits with a term of four years and 2.05 percent for five years, i.e. only 0.05 percent more, the longer term does not seem particularly attractive. However, the same bank does not always offer the best interest rates for different terms. In the worst case scenario, you will have to split your money among three or four financial institutions if you want to get the highest interest rates (from safe banks) each. That can be annoying. Especially when the conditions change every week and the ranking lists with the best conditions are constantly being reformed. When interest rates rise, the interest rate ladder yields higher returns because investors benefit from better fixed-term deposits every year. In contrast, when interest rates fall, the overnight money strategy is ahead. It is also more flexible because half of the money is available at all times.