‘Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as hitman’
(Ronald Reagan)
Based on common beliefs, one measure of the financial success we achieve is how much wealth we have accumulated and how much growth each year.
We feel happy when our income today is higher than last year, and expect our assets in the form of savings, deposits, bonds, mutual funds, stocks, gold, property, collectibles and others that can go up at any time. Conversely, we will feel upset and disappointed if we find that today we get not as much as we get in previous times.
Often we forget to calculate the actual increase in income and asset’s earnings when compared with the increase in the price of goods and services. Increase in salary by 10% compared to last year will certainly not pursue the necessities of life that rose 18%, for example. And bank deposits with 6% net interest after taxes have not been able to close this year’s inflation rate which is expected to reach 9% this year.
Without realizing it, inflation was undermining the purchasing power of money and the value of the assets we have. And if not careful get around in the long run, instead of prosperous, the quality of our financial life even decline. Borrowing Ronald Reagan’s words quoted above, inflation is similar to the robbers to watch out for. In fact, many governments in different parts of the world are falling, for lack of caution controls the inflation that is harming their people.
Causes of Inflation
Inflation is generally caused by 3 (three) main factors.
First by what is popularly referred to as pull of demand, that is, when the demand for goods and services increases is higher than the increase in supply. The increase is usually due to high economic growth, increased prosperity and purchasing power, a better consumer confidence index, and the amount of government development spending.
Secondly, it is caused by cost push, that is the increasing price of goods and services because of the rising cost for the procurement. There are many things that can drive costs: Increase in wages and employee compensation, rising prices of raw materials and capital goods. The weakening of the domestic currency makes the rising prices of imported raw materials or the price of local goods denominated in US $. Distorted and inefficient distribution networks due to structural problems or due to monopoly. Temporally, natural factors such as calamities, crop failures and seasonal changes can also lead to increased costs.
Third, because of government policy. Withdrawal of subsidies on oil or other commodities, will drive prices. Similarly, monetary policy that looses liquidity will encourage business expansion and higher public consumption and result in inflation.
Controlling Inflation
Measured inflation is good for growth. The bad is inflation that is out of control and out of target. Bad for the community for cutting purchasing power, bad for the government because it is politically unpopular. That is why, there needs to be a balanced management of economic growth with the rate of inflation.
From the side of the government and the financial authorities, there are usually several policies undertaken to control inflation.
From the investor side of the portfolio, in the short term the rise in the interest rate is actually bad for bond prices and interest-sensitive stocks such as the financial and property sectors. So investors need to recalculate economic growth forecasts and forecasts for each type of investment. As well as re-shuffle its asset allocation to cope with rising inflation
Investment Allocation
As previously discussed, the purpose of investing is to secure the value of assets that have been owned now (wealth preservation) and increase (wealth accumulation). Some types of assets that can be used as a basic asset in investing consist of real assets and financial assets. Banking products, capital markets and insurance products. Property, precious metals, business rights, collectibles and others.
Each type of asset has its product characteristics, risks, potential returns, and ideally investment period.
From the empirical data it is concluded that the asset allocation blend is the main factor in obtaining the amount of yield achieved. The key is how to mix the amount of investment in each type of asset, adjusted for investment objectives, risk risk, the potential return (return) and the time to invest. And most importantly, the portfolio should give a higher return on inflation!