How to protect yourself from inflation in the stock and bond market? By investing in the stock market, we have protection against inflation. Inflation, as we already know, is treated in the increase of prices and services. Companies sell these goods or services, which means that if the price or service increases, they will also increase their sales, so more sales means higher stock value, higher profit and higher dividend.
But make no mistake, we don’t mean that if the inflation is high, it is better for the stock market, because it means that the value of the stocks and the dividends goes up, besides, the high inflation creates instability in the stock market companies, once the investments and the economic activities are reduced. The ideal for both the stock market and the fixed income would be moderate inflation, which is the norm and companies can also continue to grow.
Any investor should have the security to protect himself from inflation. Normally, fixed-income bond investments are not a place to guarantee this variable, since it affects capital and interest. If you put the capital into fixed income, if you spend the interest, the real value of the patrimony can be reduced for each year that passes by the effect of the inflation, therefore it is not viable to live of the income investing in fixed income.
Therefore, the lower the inflation, it will be good for the Stock Exchange as for the bond market. But inflation, even if it is low, always affects the fixed income and, in return, is a protection against it. The most normal is that the dividends and profits of the strongest companies grow at a faster pace than inflation.
And if I risk and invest and hyperinflation is established, what can I do?
Protect your investments with companies that produce goods and services protected against inflation. Producers of essential goods such as energy and telecommunications may be safer from hyperinflation.
Invest in the purchase of goods that do not tend to lose their value over time, such as jewelry, gold and works of art. It can consider buying gold shares through a Stock Exchange Fund that holds gold bars.
Purchase of Series I bonds. These are Treasury bonds that come with a fixed interest rate and automatically adjust to increase or decrease with the rate of inflation.
Purchase of Treasury Securities Protected Against Inflation (TIPS). It is a Treasury bond that adjusts to inflation and pays interest twice a year.
Reduce your interest expenses. During hyperinflation, interest rates rise sharply, then increase interest on mortgages or loans. You can protect yourself against this by making sure you have a fixed interest rate on large purchases and pay your mortgage, your car and your credit cards before hyperinflation occurs.