20.03.2025

Inflation in Focus: Impacts on Investment Classes

Inflation is like an invisible thief that lurks in the shadows, gradually stealing the value of money. For investors and private savers, understanding the impacts of inflation on different investment classes is crucial for making wise decisions. While fixed-income investments and cash face pressure, real assets and stocks offer both opportunities and risks. In this article, we will examine how inflation affects these assets and what strategies investors can follow to protect their portfolios.

The Silent Theft: How Inflation Erodes Fixed-Income Investments

Fixed-income investments and cash lose value due to inflation.

Inflation is an often-unrecognized phenomenon that gradually erodes the financial foundation of savers and investors, particularly in fixed-income investments. This form of investment, which primarily includes bonds and non-interest-bearing bank deposits, is often considered safe and stable. However, in times of high inflation, they can pose a challenge. Understanding how inflation works and what mechanisms drive the loss of value is essential for an informed investment strategy.

A central aspect of fixed-income investments is the real interest rate, which represents the difference between the nominal interest rate and the inflation rate. In an ideal world, the nominal rate exceeds inflation. However, in reality, it is common for inflation to exceed the nominal rate, leading to negative real rates. This means that, ultimately, the purchasing power of returns suffers due to inflation. For example, an investor with a 5% inflation rate and a 4% nominal rate is effectively losing 1% of their purchasing power per year.

Additionally, term deposits are not protected from the silent devaluation. Liquid capital held today continuously loses value, resulting in a reduction of the overall financial buffer. Without appropriate adjustments, investors suffer a significant decline in their financial security over the years.

However, there are ways to protect oneself from this loss of value through strategic hedging. One of the most effective methodologies is investing in inflation-resistant investments such as stocks and real assets, which tend to grow in line with rising prices. Furthermore, real estate-backed investments may experience more stable value preservation and potential appreciation due to their nature as real assets.

Equally important is portfolio diversification. By spreading capital across multiple investment classes and regions, investors reduce the risk that a portion of the portfolio is eroded solely by inflation. “Buy and hold” strategies should therefore be regularly reviewed and adapted to address changing market conditions.

These proactive measures can not only compensate for silent value losses but also offer the opportunity to benefit from unexpected market situations. Ultimately, awareness of inflationary dynamics and a willingness to continuously adapt the investment strategy are essential not only to protect assets but also to grow them over the long term.

Far-Sighted Values: The Role of Real Assets and Stocks in an Inflationary World

Fixed-income investments and cash lose value due to inflation.

In times of high inflation, real assets and stocks often prove to be important supports to protect wealth from the loss of purchasing power while also capitalizing on potential value increases. Real assets, primarily consisting of real estate and precious metals like gold, offer a foundation of tangible value. Real estate often benefits from rising rents and prices, which adjust to the cost of living. Precious metals, particularly gold, are considered safe havens, as their value tends to rise during inflationary periods. However, there are also risks such as illiquidity and potential market fluctuations that can affect the value of such assets. Imbalanced investments, such as betting on a single asset, carry the risk of concentration.

Stocks, on the other hand, offer a different approach. Companies can pass on price increases, which can lead to higher profits and thus a natural protection from inflation. In particular, companies with strong pricing power and innovative products have the potential to generate high long-term returns. However, market risk remains an essential factor, as stock prices depend on many external influences. Emotional decisions, such as jumping on trends out of greed or fear of missing out (FOMO), can lead to reckless choices. Furthermore, the individual risk of a company remains significant, either due to financial fragility or inadequate management.

The strategy that considers all opportunities and risks is based on diversification. A well-balanced portfolio, which includes both real assets and stocks, minimizes risks through dispersion. A long-term perspective, which ignores short-term market movements, supports portfolio stability. Individual risk tolerance also plays an important role that investors should consider in their decisions. Financial expert advice can be decisive in developing a tailored investment strategy that meets individual needs and possibilities. In this way, investors can not only protect their wealth in the face of inflation but also grow it through wise choices and a well-considered strategy.

Frequently asked questions

Inflation is an often-unrecognized phenomenon that gradually erodes the value of fixed-income investments, such as bonds and non-interest-bearing bank deposits. This is due to the real interest rate, which is the difference between the nominal interest rate and the inflation rate. In scenarios where inflation exceeds the nominal rate, the result is negative real rates, which implies a reduction in the purchasing power of returns.

Term deposits are also not immune to inflation. Capital held in liquid form continuously loses value due to inflation, resulting in a decrease in overall financial security over time.

To protect their portfolios from inflation, investors can invest in inflation-resistant investments like real assets and stocks, which usually grows with inflation. Real estate-backed investments may also provide stable value preservation. Another effective strategy is portfolio diversification by spreading capital across multiple investment classes and regions.

During periods of high inflation, real assets like real estate and precious metals can provide a tangible value foundation. Real estate often benefits from rising rents and prices, while gold’s value tends to increase during inflationary periods. Stocks offer a different approach as companies can pass on price increases that may lead to higher profits, providing a natural protection from inflation.

Risks associated with investing in real assets include illiquidity and market fluctuations which can affect their value. Betting on a single asset also carries concentration risk. Stocks have market risk as their prices are influenced by many external factors. Emotional decisions like fear of missing out (FOMO) or greed can lead to reckless investment choices. There’s also the risk of choosing a financially unstable company or one with poor management.