There are many reasons to invest, but especially when inflation is high. Let me explain why.
When inflation is high, interest rates are often raised. Banks tend to raise lending rates sooner and more significantly than deposit rates. They often delay raising deposit rates as long as possible, speculating that customers won't leave immediately. And they're right! If you buy interest-bearing securities, such as bond funds or money market funds, they move with the interest rate on the same day. This means that in an environment where interest rates have risen significantly recently, it's often wise to place surplus liquidity in bond or money market funds rather than in a bank account. Money market funds are suitable for short horizons as short as 6 months, while for horizons of 2-5 years, bond funds are worth considering.
If you're able to let your money sit for 5-6 years or more, you also have good opportunities to protect yourself against inflation through equity funds. When you buy real estate funds, you’re buying into companies that often have rental agreements with inflation adjustments. That’s inflation protection in itself! But in general, other companies and businesses also have the ability to raise their prices, and with that, they can become an inflation hedge for you. When you buy a stock or an equity fund, you're buying into companies that do exactly this.
Note that when interest rates rise, the stock market can react negatively. It often does. So, be cautious, especially with equity funds, as long as rates are rising. But if they’ve been rising for a while and the markets have already dropped significantly (like now) – it could be a very good time to start investing counter-cyclically. The stock market is often a few months ahead of the real economy. For example, Carnegie's real estate fund (Carnegie Fastighetsfond Norden) fell by 45% last year. So far this year, it’s up 14% – despite interest rate increases. Much of this has already been priced in.
With that, we hope more people take advantage of the unique timing we're in and get started as investors. If the fundamental value drivers for real estate or other businesses are still there, then a 45% drop is very good news for those looking to get started.
Seize the day, seize the opportunities.
Check out real estate or private equity courses in the Stack app! Both are sectors that have dropped significantly due to, among other things, interest rate hikes over the past year.
