Investing Fundamentals: Is Future Inflationary or Deflationary?
In the investment meeting I go to, I always hear the discussion whether or not future is inflationary or deflationary and some people don't really get why this discussion is very important. Yes, some investments like real estate are in some aspect local. However, understanding whether or not future is inflaionary and deflationary is critically important in order for the successful investing since investment choices and strategies will drastically change (I can even say completely the opposite) depending on the future is inflation or deflation. So, in this blog, I would like to discuss that here are two ways to invest; inflationary approach and deflationary approach. Depending on inflation or deflation in the future, outcome will be massively different.
First, I would like to discuss about deflationary approach. This approach is working very well in the condition of low inflation or negative inflation. Investment choices can be
- Investing in Real Estate Note (Be a bank)
- Investing in bond
- Investing in REIT
- Investing in Annuity
- Investing in Mutual fund
- Investing in stock (most of stocks)
- Put the money in saving
- Investing in 401K
Basically, this approach is that we put some money into any of those financial vehicles and expect the return in certain times in the future (We need to wait for a long time to get the outcomes for some of those investments, such as 401K or Annuity. For others, we can collect the money in monthly basis from the day one like Real Estate Note). This approach works fine as long as there are low or no inflation in the future...
However, what if current economy is highly inflationary? You will collect the money in cheaper and cheaper dollars since inflation will destory the purchasing power of the currency in every single minites. Investing in note is still relatively okay for moderate inflation since we can collect the money from day 1 and constantly receive the money in every 30 days or so. But, how about mutual fund, 401K or Annuity? We need to wait at least 10 - 20 years in order to get the fruits of the compound interest (for 401K, it is required for everybody to hold the money into 401K until age of 59 and half). After 10 to 20 years, what do we think the value of the currency going to be? Even if we invest in mutual fund or annuity to get $100,000 after 10 years, if price of egg becomes from 10 cents to $300 then, it does not get any good.
On the other hands, there is inflationary approach. This strategy will work very well during highly inflationary period. Examples of inflationary approach are:
- Investing in precious metal
- Investing in some stocks and ETFs (precious metal stock, mining stock or some reverse ETFs that yield better during currency collapse)
- Investing in real estate with load of debt (Load of debt part is very important)
In current inflationary environment (printing money across the globe, possible war in Iran and possible some of PIIGS nations' default), value of the currency will be chaper and cheaper as central banks around the world will crank up the printing presses. Therefore, price of actual commodies like gold and silver will go up exponentially. And, for investing in real estate with debt, we practically lock the principal amount with histric low interest rate. While price of everything will go up in price due to inflation, my mortgage payment will stay the same for 30 years. Therefore, I can keep paying back my debt in cheaper and cheaper dollars as Fed is printing money in unprecedented speed. Both approaches will work great as long as each individual understands the future prospect of the macroeconomic environment. That is, is future inflation or deflation at longer term horizon?
I already make my own decision that future will be inflationary and prepare my strategies accordingly. My approach is to investing in gold and silver or other stocks that works well during highly inflationary period, while I am investing in real estate with borrowed money so that I can use that money to investing in precious metal or other investments that hedges against inflation or beating current inflation rate of 10 - 12%. I would suggest everybody to get financially educated and make your own decision because I can pretty much gurantee that people's future standard of living will further decline (Significant decline) in this coming years if you are not financially educated.
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