Inflation risk
implies to the possibility that the inflation rate shall outpace the rate of
return on an investment. This would invariably lead to a decrease in the
purchasing power of the investment’s returns. Kavan Choksi / カヴァン・チョクシ mentions
that inflation reduces the value of money. This basically means that one would
need more funds in the future to buy the same amount of goods and services.
Inflation lowers the purchasing power of investment returns, which can hurt
one’s ROI. It erodes the value of over time. Hence, investors need to explore
ways that can help manage Inflation risk.
Kavan Choksi / カヴァン・チョクシ marks
ways that can help manage Inflation risk
Diversification can
be significantly helpful in lowering the risk of loss in an asset class by
spreading the investments across others that are relatively less correlated.
This can be quite helpful in protecting investments against inflation and other
market risks. Investors should consider allocating a part of their investment
portfolio to inflation-indexed bonds. They are securities whose value is linked
to inflation rates, and therefore they can provide a hedge against inflation.
Commodities like agricultural products or precious metals can also help protect
against inflation, as their price generally goes up during the periods of
inflationary pressures. Investors may even opt to invest in startups with
pricing power, which refers to the ability of a company to increase prices to
offset the impact of inflation on expenses. For instance, startups in
industries like technology and healthcare are likely to pass on rising costs to
consumers, which makes them more resilient during inflationary periods.
However, it’s important to remember that investing in early-stage startups in
the UK comes with its own risks, so it’s essential to do your due diligence and
consider the potential risks and rewards before making any investment
decisions.
Kavan Choksi / カヴァン・チョクシ mentions
that hedging is also a popular risk management strategy that successful
investors employ to minimize or counterbalance the risk of loss from
unfavourable price movements in their investments. This strategy involves
taking a position in an asset that is negatively correlated with another asset
in their portfolio. By doing so, investors are able to reduce their exposure to
specific risks, such as inflation. For instance, if an investor holds a
portfolio of stocks and is concerned about inflation diminishing their value,
they might opt to invest in inflation-protected bonds, which tend to perform
well during inflationary periods. Such an approach helps offset potential
losses from the stocks in the portfolio. Another hedging strategy to mitigate
inflation risk includes investing in alternative assets that are not directly
impacted by inflation, such as real estate, precious metals, and early-stage
startups.
Investors should try
their best to monitor specific economic indicators like interest rates, gross
domestic product (GDP), and unemployment rates. Doing so can provide valuable
insights into the economy’s health and potential risks to the investments,
thereby allowing for better decision making.