Investment decisions amid inflationary pressures

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MAKING smart investment decisions during this inflationary period is key to protecting what you have and taking advantage of opportunities that present themselves since inflation is here to stay for a while.

It is best to review your financial situation to see whether you can continue to meet your expenses or whether you are overly exposed. Only after a review should you decide what to do but don’t panic sell.

“It is best to remain calm and not panic buy or sell like how generally most people would do. It’s an understandable and normal reaction but we must try to avoid making poor financial decisions during down times,’’ said IPPFA Sdn Bhd licensed financial planner Kimberly Law.

Her view is that “it is good to stay invested depending on your risk appetite and investment horizon. It also depends on your current financial situation and financial goals to really make the best out of this situation. All investment instruments can be good or bad as they are not one-size-fits-all.’’

Manulife Investment Management (M) Bhd licenced financial planner Rajen Devadason added that “we should be worried (about inflation) but not to the point of letting fear paralyse us. Remember that we have entered a period of high regular inflation rates but not a period of so-called hyperinflation, which is far more damaging.

“Look at your circumstances and liquidate a portion of investments that might be showing some profits still to raise perhaps cash reserves to be parked in the bank and in pure money market funds to cover expected lumpy expenses over the next 18 months,’’ he added.

For the rest of the investments in your portfolio, he recommends that you increase the weightings of those asset classes that are good hedges for inflation such as commodities, equities and even investment real estate in light of the return-to-work policies of businesses worldwide.

Devadason also believes that gold is just one specific commodity. He recommends buying and holding – and adding to during dips – a broad range of commodities.

“Courageously add to such investments during intermittent market dips if your job is safe, your business is sound and you have nerves of steel,’’ he said.

Short-term bonds are more attractive than long-term ones, and his asset class preferences for short-term tactical investments right now are cash – because of rising interest rates – and commodities – because of rising prices.

Law’s view is that it is good to invest in equities.

Equities will eventually grow with time as the economy recovers. The most common instruments are stocks – if you prefer an active approach – or managed/mutual funds that invest in equities – if you prefer a more passive approach.

As gold is often said to be a natural hedge against inflation, is it therefore a good time to buy gold?

Law’s view is that investing in only gold as an alternative to holding cash may not work as well now as 20 to 30 years ago. There are other precious metals like palladium which offer a much higher growth compared to gold and silver.

Devadason also believes that gold is just one specific commodity. He recommends buying and holding – and adding to during dips – a broad range of commodities.

How can you protect your cash in an inflationary period when prices are rising and the value of your cash holdings do not?

Devadason’s view is not to keep too much money in cash. Ideally just enough to cover the next 12 to 18 months of planned and projected expenses.

For those with large portfolios, the remaining funds should be focused on high quality equities and real estates.

Law said relying 100% and just holding cash is not a good idea. Bank deposits or money market funds are good short-term instruments if you plan to use the cash soon. However, storing it for the long term is not a good idea.

Cash may be king to some and there may be plenty of investment opportunities out there amid the inflationary pressure but what is overly shiny may not be real too.

“Beware of attractive, too good to be true investments. Lately, there have been financial products related to money games like cash trusts that are very much like Ponzi schemes. Stay away from anything that promises extremely high returns, zero risk (no losing capital) and is very liquid (flexible, can easily cash out money).

“You need to be careful of the underlying assets and check whether the company is properly licensed. Avoid trendy investments because trends come and go,’’ Law said.

Hopefully, this inflation will not be a rough ride for everyone and budgeting helps in such situations to know where your money is coming and going.

“It is anyone’s guess (how long this inflationary period will last). My own guess is that we won’t tip over into the insanity of hyperinflation where annual inflation rates reach or exceed 1,000% a year. That typically only occurs when the people in a country lose faith in its national currency,’’ Devadason said.

He added that “we must retain a sense of perspective (during these times) as no dark and stormy night lasts forever. This too shall pass.’’