Inflation Negation

Can you use investments to safeguard your money against rising inflation? Ben Tutty talks to the experts and discovers you can.

Making ends meet in a ridiculously expensive country like New Zealand is hard.

A block of cheese will set you back about NZ$17, gas has almost tipped NZ$3 a litre and a house deposit could cost you an arm, a leg and your first-born. The worst part is – inflation is on the rise, so the cost of living here will probably keep increasing. Is this something we should be worrying about and preparing for? And what can everyday investors do to protect our wealth against inflation?

The inflation situation

Inflation, or the rising cost of goods and services, decreases the buying power of your money, or in other words, after inflation the same amount of money buys less stuff.

When inflation is chugging along at 1 to 3 per cent, it’s usually a good thing for us and the economy, but when it’s higher for a sustained period it can be bad news. As of December 2021, inflation was running at 5.9 per cent and ANZ is forecasting it could rise past 7 per cent and beyond. For younger Kiwis this is an entirely new phenomenon, but Mary Holm, New Zealand’s foremost personal finance journalist, says older generations have seen this before.

If you’ve got long-term money sitting in the bank or a low-risk fund, be braver with that money, regardless of inflation.

“If you were around in the 70s and 80s, inflation was up around 18 per cent, and we just got used to it. We got 16 per cent to 17 per cent on bank term deposits, but inflation was even higher.” As well as decreasing the buying power of your money, inflation can decrease the effectiveness of your investments. After all, an 8 per cent annual return doesn’t look too hot when everything costs 10 per cent more per year, does it?

So what’s the solution?

The secret to protecting and growing your wealth during inflationary times isn’t really much of a secret, says Holm. “Returns from shares and property tend to exceed inflation. Not always over the short term, but over the long term they do. “A recent study showed that if you invested a dollar in the US share market in 1900 you’d have $710 in 2000, after you adjusted for inflation – and around $17,000 when not adjusted.” Holm adds that the main thing during uncertain times is to think carefully about your investment horizons. Or in other words, when will you need to use the money that you’re investing? If you can wait more than 10 years, you may be better off considering higher-risk, higher-growth investments like shares and property. If you can only wait 3 to 10 years, you might look at bonds, while cash funds and term deposits might be your best bet for shorterterm stuff.

Investing in high-growth assets over the short term is always risky and during times of uncertainty large dips in markets can be more frequent and pronounced, meaning you’re more likely to lose money.

Opportunity in uncertainty

Uncertain is one word for this moment in history, but that may be an understatement.

There’s war in Ukraine, a global pandemic, fast-rising inflation, and Will Smith slapped Chris Rock at the Oscars. Despite that, Stuart Millar, chief investment officer of Smartshares, one of New Zealand’s leading investment platforms, says that uncertainty can present opportunities. “People naturally shy away from taking risks when things are uncertain, but actually it can be a good idea to do the opposite. To be contrarian. “For example, look at those fallen angel stocks, like Tesla. Some of them have been smashed recently, so they now represent better value than they did a few months ago.” Millar adds that it’s also worth thinking about which assets usually perform well in inflationary or late cycle periods. This may include gold, infrastructure, commodities, and bonds. Last of all, you should keep the future in mind, because the fact is, super-high inflation may not be around forever.

When will things get better?

The problem with inflation is that it can snowball. For example, employees might go to their employers and ask for a pay rise because everything costs more – which in turn drives prices up further. Businesses may absorb these rising costs in the short term, but when they continue to increase they may have no choice but to put their prices up. Millar explains that while this is certainly true, inflation's roll may be slowing already. “The consumer can only stand so much, so there comes a point when they cut their spending, which can help slow inflation.

“Central banks are of course hiking interest rates, which will slow the demand side, and some supply-side stuff and oil prices may ease soon.”

What does all that mean for us everyday Kiwis and part-time investors? Mary Holm reckons it’s a case of sitting tight and perhaps even taking more risks. “Just weather the storm and see what happens. Don’t panic. “And if you’ve got long-term money sitting in the bank or a low-risk fund, be braver with that money, regardless of inflation. “Even if you put 25 per cent of your KiwiSaver into a higher-risk, higher-growth fund … just dip your toes in.”