What does inflation mean in the context of asset accumulation?

We can have long debates about the causes of inflation or the meaning of the word (originally: expansion of the money supply), but that would not take us one step further when it comes to our savings. So let's take a closer look at what the current inflation rate of over 10% means in this context, as opposed to the desired inflation rate of 2%.

It is important for investors and savers to know that inflation raises the price level in the long term. This applies to all goods and services as well as securities. The market phenomenon of price inflation can be driven by supply-side shocks or demand-side gains in purchasing power. Both causes have different effects on HOW an asset class reacts: When supply tightens due to inhibited access to resources, the focus should be on the solution mechanisms. Stock market and consumer prices will only rise until the market has calmed down and will then fall sharply again. One example from recent history is the broken supply chains from China or Ukraine. In the end, there are winners here too - namely those who solve the problem sustainably or those who have bet on the problem solvers.

If nominal purchasing power increases (e.g. due to temporary deflation, high lending or economic stimulus programs), the bet does not look quite so simple: This form of price inflation is sustainable; savers and investors must be prepared to lose their cash holdings. The winners are those whose goods and services are indispensable or who excel here with strong innovation.

In general, everyone must be aware that we are dealing with continuous price increases, even if they are cyclical. Savers should be able to ensure that their assets are not eroded by inflation for decades.

The right approach

Measured against the US dollar or euro, we have been dealing with strong and sustained price increases in equities, ETFs, crypto and gold for decades. This does not mean that every single security automatically offers protection against inflation.

Let's take a look at the current situation: inflation figures have been in double digits for months and we can be sure that most prices will not fall below their pre-2022 levels. Tragically, this is a combination of lost supply chains and massive stimulus programs, as well as higher interest rates. For investors, this is anything but easy, because: Inflation expresses a lack of confidence in the economy, which usually results in the sale of shares, causing their prices to fall initially. If you have already invested before inflation in order to protect yourself against it, you may fall below the entry price and a nail-biting ride begins. Even major tech giants could go bankrupt in a severe recession, rendering their shares worthless.

The main problem is for those investors who have invested too much at once. It is advisable to invest slowly, even if you suddenly have money to spare. Longer intervals make it easier to get a feel for the market, reduce losses and bring the right spirit into play so that you don't immediately give up in frustration. Of course, this strategy reduces the prospect of short-term gains, but in a phase of strong inflation, this strategy can backfire completely.

Even if the money in the account dwindles faster because prices are rising, the chosen investments must ultimately perform well enough to at least compensate for inflation, plus fees for brokers and capital gains tax. If you gamble away money, you lose twice as much during the inflationary phase.

Okay, what about those who want to get in now? The same applies here - only even more so. We can see that individual stocks are going up again, but we shouldn't be tempted to buy too much right now. Several indicators, not just one, must be used to determine when the right time has come to enter the market. In these times, all-time highs and all-time lows tend to be red flags for an entry. Stocks that have recovered substantially are always more promising.

However, different asset classes should also be treated differently: For gold, get in if you don't want to pay out anything in the next 20 years. The past shows that gold has always worked well over a long period of time.

For ETFs, it is also a good time to invest slowly and for the long term.

For shares, especially in the tech sector, you should pay even more attention to short-term indicators such as volatility and performance curves and, of course, the companies' sales figures: massive price movements usually have a small counter-movement in the aftermath. It is important not to fall victim to the deceptive scenario of a supposed market recovery. Characteristic curves such as the 200-day moving average help to recognize whether there is sustainable support for an asset. With individual stocks, it is always important to find the answer to the question: Which stock will still be ahead in 10 years?

As far as Bitcoin and crypto are concerned, this asset class is still too young to really know how it works. So far, bitcoin and almost all other cryptos have performed as leverage to the NASDAQ. It could be that this trend has been broken, but we have only been dealing with these assets for 10 years: little experience, more guesswork. For most investors, it has paid off to invest slowly and try dollar-cost averaging. In addition, don't be tempted to sell quickly and leave it alone for a few years. Short-term profits are always on the cards here, and it is better to wait for months rather than just days.

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