With current inflation exceeding seven percent in Germany, the associated devaluation of money is a very topical issue. As an investor, one should always consider inflation. Especially those who, as owners of an advertising & marketing agency, earned a lot of money during the Corona period, should now also invest strategically. But what options are available to protect oneself from inflation? This guide addresses several points related to this question.
Inflation Protection for Agency Owners: How to Invest Correctly
Inflation (Latin: „to inflate“) means the devaluation of money. If the money supply inflates and grows faster than production in a country, average prices rise. The price level increases, and the value of printed money falls.
Typically, debtors tend to benefit from inflation, while it harms creditors. Since money is worth less during inflation, the real value of claims also shrinks. The state is the largest debtor (government bonds) and thus emerges as the biggest winner.
Connection: State, Key Interest Rate, Inflation, and the Solution through Targeted Investments
The state has a significant influence on inflation, as it controls the key interest rate through the central bank. In the European economic area, this is the EU and the ECB. If the key interest rate is lowered, money becomes attractive for banks, and they borrow more money. This increases the money supply and thus the inflation rate.
The opposite is true when the key interest rate is raised: banks borrow less money. The consequences are less growth, and inflation is curbed.
When inflation occurs, the primary sufferers are citizens, especially from the middle class. Salaries do not rise proportionally to inflation. Purchasing power decreases more and more with rising inflation.
Considering Inflation Sensibly as an Investor
Inflation fluctuates over time and can be even higher than the current 7.4 percent or significantly lower. For every investment, inflation should be factored in, in addition to risk. The investment should therefore generate at least as much return as inflation.
Those who do not want to calculate too conservatively will assume an average annual inflation of three percent for their calculations. For an investment to be worthwhile and at least serve as inflation protection, it must therefore yield more than three percent annual return.
Important: Always remember in your investment decisions that a higher return is also associated with a higher risk of loss.
Investing and Inflation Protection in One Asset
Which investment opportunities are suitable for inflation protection? Three asset classes with inflation protection potential (without claiming completeness):
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Stocks: Good Inflation Protection with Risk
Stocks are considered real assets because real, substantial values of the respective company stand behind them. Stocks, purely from the perspective of return opportunities, are good inflation protection. Because when the money supply increases during inflation, stock prices often also rise.
Rule of thumb: According to studies, stocks are the best inflation protection up to an inflation rate of five percent. However, higher inflation rates also negatively affect the stock market with unpredictable risks.
Over a longer period, a diversified stock investment should, with high probability, outperform inflation. The largest German stock index DAX, for example, rises by an average of eight percent per year.
Brokerage recommendations with particularly low fees per transaction (order and partly free savings plans):
- Trade Republic*
- CapTrader*
- SmartBroker*
- Flatex Degiro* (higher fees, but largest selection of ETFs and stocks worldwide)
- Comdirect Depot*
And for professional traders with full access to international markets, we recommend InteractiveBrokers* as one of the largest depot brokerage providers in the world.
Gold: Always Popular with Investors
The asset class gold is considered a safe haven. Due to tax benefits and reliable value increases, gold is considered by many investors not only as inflation protection but also as an integral part of a diversified portfolio.
Gold is one of the oldest means of payment in the world and is still considered a „crisis currency“. The purchase of gold coins, such as the well-known Krugerrand, is the first choice for investing in crisis-proof real assets with inflation protection. Various experts recommend covering gold and silver with a share of five to ten percent of the portfolio. Depending on the investment goal, this share can also be higher.
Real Estate Investments
Real estate is only profitable during inflation if the higher costs can also be passed on to rents. If this is not the case for a landlord, the running costs quickly exceed the rental income, and one even incurs losses. Often, very rapid rent increases cannot be passed on 1:1 to tenants.
Selling a property at peak prices during inflation can be a good deal, provided a buyer can be found.
A risk with real estate remains the state: through possible special taxes or forced mortgages, up to expropriation, everything is possible here.
Disclaimer: This article does not constitute investment advice, investment recommendations, or action recommendations in any way. It serves as guidance for alternative diversified investments.
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