Investment ADVICE for the most conservative

Inflation is an important consideration when it comes to valuing our savings or the fruits of our investments. The fear of inflation is not undeservedas it can be challenging for both investors and consumers.

And this is the present situation. Price levels have not stopped climbing. Today, according to CPI data, estimated annual CPI inflation in March 2022 is 9.8%according to the advanced indicator prepared by the INE. This rate would be the highest since May 1985.

Depositors come from a time of zero remuneration and a boom in commissions by the banking sector and, to make matters worse, they are highly affected by inflation, since it has a direct and indirect impact. The direct hit is when savings are devalued because the cost of living has increased. The indirect impact is when savings are affected because purchasing power has decreased.

Spain has an unusual attachment to deposits, despite the null profitability

For conservative profiles, deposits have been an option to consider because, despite the null remuneration, the aversion to volatility and the tranquility of liquidity compensated in a low inflation scenario.

But when the price hike approaches 10%, many conclude that their best option is to put some of the savings to work, with three goals in mind:

  • Increase profitability: Conservative investors should look for investment alternatives that allow them to improve their profitability.
  • reduce risk: It is important to reduce the risk of savings to avoid losses in case inflation continues to rise.
  • Diversify savings: Diversification is the best way to protect savings from inflation. Conservative investors should invest in different financial assets and products to reduce risk.

Bonds and Stocks for the Conservative Investor

The talkative investors will seek to diversify away from cash and exposure to bonds and stocks to deal with inflation. But not all bonds and not all stocks work well in inflationary stages.

Bonds are traditionally stable, low risk and good hedges of potential stock volatility. Unfortunately, the bond market does not do well with inflation.

When inflation increases, central banks tend to increase interest rates to reduce loans due to their higher cost. This causes bond yields (interest) to rise as investors demand compensation for the risk of inflation. As a last resort, the price of bonds will fall as investors lose interest in them, reducing the value of your investment.

In this category of investment, they are interesting inflation indexed bonds Inflation-protected bonds, or TIPS, are a useful class of fixed-income assets. The objective of TIPS bonds is to reduce the volatility of income and the cost of debt. TIPS bonds allow investors to be hedged against inflation and maintain the value of your investment. TIPS bonds also reduce interest rate risk, since TIPS bonds have a fixed real yield.

Bonds are not the only category of investment assets that is affected by inflation. Stocks are equally sensitive to inflation. Nevertheless, the response of stocks to inflation depends on various factors, such as the sector of the economy in which it is invested.

If we move in the field of shares, the profile of the conservative investor who seeks to protect himself from inflation must position himself in sectors and companies whose balance finds a great weight on the part of fixed assetsas they hold up well to their respective valuations in inflationary environments.

These sectors are the energy sector (oil and gas), the real estate sector represented by the Socimis that have a large brick portfolio and the basic products sector.

In these sectors, what kind of companies might be of interest to conservative investors? After selecting the sectors mentioned, the conservative investor must prioritize companies with stable cash flows or companies with low production costs with the ability to set prices so that the inflationary environment does not have a noticeable impact on the Income Statement.

Firms with stable cash flows have less likely to be affected by inflationwhile companies with low production costs can offset the negative impact of inflation by increasing the prices of their products.

Conservative investors tend to be guided by a remuneration policy that is committed to shareholders, so These stable cash flows must be accompanied by a history of constant dividends. but growing, which allows them to generate to compensate for the drop in the value of savings due to rising prices through cash inflows.

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