What to Invest in When Inflation is Rising

Hello friends. This is Vijay Bhambwani here. I hope you're doing really well in the markets both on trading and the investing front.

Now, in this video, I am trying to address a concern that many of us are feeling off late and this is something which is not just India specific but is being experienced the world over.

What if inflation rises and what if inflation is here to stay?

Remember, almost all governments have printed unbacked currency, flooded that money into the economy, into the financial markets, given stimulus, and pump primed their economy, which means that inflation is bound to rise.

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Now in this rising inflation your cost of living is likely to go up. The fact that you're investing or trading in the market means that your income, ideally in the best case scenario, your income must exceed your expenses, both survival and to a certain degree, lifestyle expenses, so that you are not distressed.

But is there a difference between trading and investing in a high inflation scenario and a low inflation scenario? I think, yes.

For example, if you are a veteran driver, if you've driven a vehicle, a two wheeler or four wheeler, through many, many years, you will realise that the experience of driving differs on whether the day is a sunny day or it's a rainy day, or if you're driving in a cold climate on a foggy day. You have to adjust the speed of your vehicle, depending on what kind of visibility, what kind of road conditions, what kind of weather you are driving through. Ditto for investing and trading.

Now, since we are expecting a probability of inflation rising, in this video, I am going to talk about what you can possibly do to mitigate some of the blow that inflation is likely to bring with it.

People like me like to call inflation as misery and the inflation index is something that we call the misery index. Many economists also like to call inflation as taxation by another name.

Now look at the hypothetical scenario of you going to the market to buy a kilo of potatoes and tomatoes. Every week, if you were to go to the market and pay Re 1 more than the previous week for a kilo of potatoes, your impact is likely to be the same as the inflation remaining constant but the government levying more tax on you because the amount of money that goes out of your hand is the same.

So many economists, especially the Austrian School of Economics, believed that inflation is taxation by backdoor means. Therefore, you will feel, experience some cash crunch, some discomfort in your kitchen and household living in high inflationary times.

Therefore fixed income securities that have fixed interest and a coupon rate as we call it, invariably let you down during these high inflation times, unless you basically are investing in inflation adjusted bonds.

Do these exist? Yes, they do.

But do they insulate you completely? No, they don't.

There is an all saying among arbitragers and hedgers. A perfect 100% hedge is yet to be invented, so nothing can insulate you full 100%. That protection does not exist. So you're fixed income securities, especially bonds and sovereign debt, etc will give you return on investment, that is for sure.

But as far as returns are concerned, they might just be below real effective inflation rates, which means negative yields.

Inflation usually means the rising price of commodities, which makes commodities a better bet in times of rising inflation as compared to equities.

Do note that during times of galloping inflation, raw material costs, which is commodities, are rising. Therefore, corporate profits tend to fall.

So park your funds in hard assets, which is commodities during rising inflationary times and take this money out when hard asset prices stop rising and invest them back into equities. That will protect your money and also ensure that not only do you have a store of value, but you also have capital appreciation as well.

I prefer, in the hard assets space, bullion because it has a track record of 3,000 years, a proven track record of 3,000 years, as not only a store of value but also a capital appreciative instrument during inflationary times.

Now, depending on whether your pockets are deep enough, if you are high net worth or an ultrahigh net worth investor, investing in real estate for the long term is also a good idea during the initial stages of rising inflation because of the fact that the supply of land is unlikely to rise. However, the human population continues to grow, and therefore, when the fiat currency, which is paper currency, due to high inflation, erodes its purchasing power, what is known as purchasing power parity, real estate prices, decade after decade, will go higher.

Do remember that real estate as an investment class is infinitely less liquid as compared to equities. You want to sell 10 crore worth of rupees, 10 crore worth of shares? Depending on which kind of company of invested in, if it's a frontline large cap company, you can get the value of 10 crores in a minute or two. You can simply dump those shares and take a pay out in T+2, which is transaction day plus two working days.

But you can sell an apartment in two days. So I am talking of real estate in multiples of years and decades rather than as a short term investment.

So high net worth and ultra-high net worth individuals, should basically consider real estate as a viable option during high inflationary times, especially if inflation is likely to be sticky.

The one thing that I cannot emphasise enough is that you have to be continuously on your toes and shuffle your money in and out of asset classes during high inflationary times.

Now this might go against that philosophy of some people who say, even though the market is falling and they're basically talking about following the Oracle of Omaha, etcetera, I'm not against that. I have no dispute against it. I am very sure that long term investments yield you multiplication of your capital.

But why stick to an asset which is going down during a down phase? If you were to get out of that, you will pay taxes, but taxes are paid on your profits, not on your capital. Invest it elsewhere like for example hard assets.

If for two years inflation is right going to rise, you take your money out of equities, which are susceptible to inflation, put it in hard assets, which again give you capital appreciation. Take it out after two years, pay tax on it, and then go back to equities after inflation bottoms out and starts rising again.

You will, in spite of the fact that you paid taxes on your profits, still be better of than your contemporaries who rode the price all the way down and then come up all the way up to ground zero.

I would say that being nimble footed and on your feet during inflation times, the will, the need to move your money in and out of assets is very important. That's what separates the super cool investors and traders from the regular guys.

I hope this helps you formulate a good road map for you in inflationary times and help to become better traders and investors.

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I hope you're staying safe, taking care of your investments and trades, your health, your family, and friends. Thank you for your patience. Thank you for watching my video.

Vijay Bhambwani signing off now. Take care. Bye.