Strategies to Combat Inflation with Investments

Inflation is expected to decline gradually in the second half of this year as economists predict that the year-on-year growth of consumer prices will finally drop to single-digit values. However, a more significant decrease is expected only at the beginning of next year. Until then, investors will have a hard time effectively fighting inflation, which decreases the value of their assets.

According to Jan Bureš, chief economist of Patria Finance, “We estimate inflation to be 10.8 percent for 2023 and 2.5 percent for 2024. The core inflationary pressures will remain relatively strong next year after adjusting for energy, food, and imputed rent effects. Therefore, the Czech National Bank is expected to be very cautious in reducing rates.” Bureš expects that the central bank’s interest rates, which determine the interest rates for commercial bank products, will go down for the first time at the end of this year. “The basic rate could drop from seven to 6.5 percent,” Bureš estimates. Slightly lower interest rates can also be expected for mortgages and savings accounts. The best savings accounts currently offer a six percent interest rate, which is far from enough to combat inflation.

However, it is possible to combat inflation with thoughtful long-term investing. “Those who have not invested for at least five years cannot overcome current inflation. However, the fight against inflation must never be given up, and it is always necessary to combat it,” financial advisor Lukáš Urbánek of Partners emphasizes.

According to Urbánek, the ideal recipe is an adequately adjusted investment portfolio from the perspective of investment horizons. “The sooner we need the money, the lower the interest rate we can get, and the harder it will be to combat inflation,” the advisor concludes.

For a longer horizon, having a larger share of stocks is recommended. Urbánek advises those interested in investing to first audit their current savings and investment contracts in their portfolios and evaluate their settings concerning their planned termination time. “Short-term reserves must be managed very conservatively and safely. This means using savings accounts, short-term deposits, and conservative investments. However, these tools will never overcome inflation,” Urbánek adds.

Medium-term reserves with a three to five years horizon can include instruments with higher risk but the potential for higher returns. “In the case of diversified investments, we consider risking a potential temporary decline in the investment value and withdrawal at the wrong time. Therefore, all types of assets have a minimum recommended investment horizon, which should minimize the risk of bad timing of withdrawal,” the advisor says.

“For a medium-term horizon, bond investments complemented by real estate and stocks are suitable. Medium-term reserves’ yields on a longer horizon exceed inflation,” he adds. For long-term reserves with a horizon of five years or more, Urbánek recommends choosing a more dynamic portfolio with a gradual increase in stocks according to the lengthening horizon. “Above 15 years, the portfolio can already be almost entirely composed of stocks,” Urbánek concludes.

According to Martin Novák, chief analyst of Broker Consulting, guiding principles for investing include diversification, regular investment, appreciation over a longer time, and, most importantly, no speculation. “Investments can be profitable for everyone who seeks good money placement. Today, investments can be made for several hundred crowns a month, and investing is no longer a discipline only for the wealthy.”

Unfortunately, there is no simple product or advice on overcoming inflation quickly, and we still do not have it as high as we have had it for a while. “In any case, it is true that money cannot be protected in a savings account. On the other hand, if someone offers a return above the current inflation rate today, I would be very wary; it is very likely a scam,” warns Novák.

According to him, the correct behavior of an investor is not determined by the current performance of an investment. On the contrary, one of the basic rules in investing is longevity.

“To complement an already established investment portfolio, bond funds are undoubtedly focused on Czech government bonds. These funds offer an attractive yield to maturity with a large diversification and a faster yield conversion in the given year during the economic decline of interest rates,” Novák recommends.

In conclusion, thoughtful long-term investing strategies can help combat the effects of inflation on investments. By adjusting investment portfolios and choosing investments with appropriate horizons, investors can mitigate inflation’s impact and achieve reasonable returns.