Editor’s note: This article was first published in April 2022. The 1.2% monthly and 8.5% annual rise in consumer prices is the US figure for March 2022, and the 6% inflation and 0.5% savings rate are examples from that time.
From the huge amount of monetary stimulus, the pandemic and the war in Ukraine to the normal inflation cycles that markets go through from time to time, we’re seeing people lose purchasing power because of inflation. From the price of petrol and cooking oil to other consumer goods, inflation is hitting people’s pockets hard.
In March, consumer prices rose by roughly 1.2% from February and 8.5% year on year. Put another way, your euros or your dollars don’t go as far as they used to.
The number one mistake you make with your money during inflation
Let’s suppose inflation is running above 6%. If you aren’t investing your money right now, it’s as if you had it in an investment that is losing 6%. On the other hand, if your money is in a savings account paying 0.5% interest, that investment is losing you 5.5% a year. Your money is losing value.
We could say that, on the one hand, the biggest mistake you make with your money is not investing it. And it’s also a mistake to keep it in low-interest savings accounts (we’ll come back to this point).
But of course, sometimes, to avoid this mistake, people who are aware that their money is losing value to inflation decide to invest it in the stock market, commodities, investment funds or cryptocurrencies, hoping to beat inflation.
And this is where, in trying to avoid one mistake, they can make an even bigger one, because the markets aren’t at their best if we go in without a clear strategy.
See also: 14 things you should know before investing in the stock market
Banks are a bad place to keep your money during inflation
Keeping all your money in low-interest savings accounts hardly pays off at any point in the history of market cycles, with or without inflation.
Even so, it’s always advisable to keep a certain amount of money in these accounts so you have cash at hand when you need it. It’s not a bad idea to keep your emergency fund in these savings accounts either.
See also: What an emergency fund is and why you should have one
What’s the solution for our money during inflation?
We’ve been giving the investment advice of staying in cash for now, even at the risk of losing purchasing power. In many cases, that’s better than making a more serious mistake with our money.
As we always say, even expert swimmers are advised to stay out of the sea when the red flag is flying on the beach. Well, right now the markets are flying a red flag if we decide to pick stocks on our own, all the more so if the person isn’t an expert swimmer.
Despite market volatility, we can beat inflation
To get a clearer idea of what we can do with our money, there’s nothing better than listening again to the great octogenarian investors and drawing on a little history.
We know that the S&P 500 has beaten inflation over 10-year periods. What’s more, a JP Morgan analysis found that since 2002 (after the dot-com crash), if we look at the market’s 10 best days, all of them came after a sharp fall, including the 2008 financial crisis and the big market crash of 2020 caused by the pandemic.
For example, if you had invested 10,000 euros in the S&P 500 at the start of 2002, you would have had more than 61,000 euros at the end of 2021. But if you had missed those 10 best days in the market, you would have ended up with only around 28,000 euros.
Advice for your money in an inflationary period like this one in 2022
If we stick to what we’ve set out, some of you will already know where we’re heading again. The most popular and sensible advice is to index your investments. It’s at times like these that people sitting on a mountain of cash are advised to invest in index funds with a long-term mindset (at least 5 or 10 years).
Despite inflationary periods and despite market volatility, an index fund tracking the S&P 500 has shown that it can grow money ahead of inflation and ahead of the vast majority of actively managed investment funds.
Remember that right now we face not just one danger when making investment decisions but two: the uncertainty and volatility of the markets for various reasons, and the dreaded inflation.
Featured image: Rick Obst, CC BY 2.0, via Wikimedia Commons.
