Investing For Beginners – Free Investment Articles and Tutorials

The effects of inflation on investment have always been known to be severe. That is why inflation has been and continues to be a major challenge for any investor. The investor needs to stay one step of inflation if he is to enjoy the fruits of his investment.


The effect of inflation can be gauged from this example. Suppose you invest $ 10,000 at 6% per annum interest rate. After a year you would have earned $600 on your capital of $10,000. However, this gain would be wiped out if the rate of inflation in your country is 10% per annum. You would need to spend $11,000 to purchase the same amount of goods and services that you could have bought for $10,000 a year ago.

Clearly, the value of money that you originally invested has gone down. In other words, you have not employed your money productively, and have lost $400. This loss will not be seen on paper but it will bleed you, year after year. This is how inflation effects your investment.

The worst affected by inflation are the fixed income securities. Their value declines every year because of inflation. The same applies to savings banks accounts. These accounts lower the value of an individual’s savings, if the interest rates they pay are less than the inflation rate.

So, how do you fight inflation? The only way is to make investments in instruments whose returns are higher than the inflation rate. This does not mean that you invest in high-risk instruments. On the contrary, you need to have a balanced portfolio that protects you from the ravages of inflation. Your investments must include equities, gold and real estate. These instruments, if chosen carefully, deliver a rate of return that is higher than compounded inflation rate.

Otherwise, inflation will eat away all your investments.

Related posts:

1. Every investment is fraught with investment risk
2. Inflation, deflation and economic considerations – part 2
3. Taxation of financial income: the effects of the reform
4. How to make investment in risky assets is consistent with inflation rising?
5. Rise in inflation
6. The changing role of emerging markets: from deflation to inflation
7. China: new fight against inflation
8. Risk-free investment
9. Beware of investment funds linked to inflation
10. The only assets that really are covered against inflation-linked bonds it