Inflation is on the rise worldwide. Economies are still dealing with the supply chain disruptions caused by the pandemic. The cost of living is increasing (think soaring food and energy costs), putting a squeeze on people’s finances.
In Africa, the situation is even more concerning, particularly in countries without robust central banking systems. Sudan, for example, has braved an inflation rate of a whopping 245% in 2022 alone. The overall inflation rate in Sub-Saharan Africa is forecast to reach 12.2%, according to the International Monetary Fund (IMF).
At this point, you’re probably wondering what all this means for your financial journey. How do you protect your finances and stay on track to securing your financial future?
The important thing to remember is that inflation is a common occurrence in economies. You can prepare for it as an investor, even if you’re in Africa.
You must identify ways to protect yourself against the devaluation of your money and continue building value even as prices increase. In other words, you need to know how to hedge against inflation. Let’s have a look at how you can do this.
Top 4 ways to effectively hedge against inflation
What follows are some of the top strategies you can use to safeguard your financial future against inflation.
Invest in global stocks
Shares generally offer some good long-term protection against inflation. The theory behind this is simple: over time, a company’s earnings will increase as inflation increases — the company will raise prices as its costs increase. This benefit will be passed on to shareholders.
Share prices may be choppy in the short term as investors worry and companies adapt, but the volatility will smooth out over time, thus providing a good way to outrun inflation in the long term. You also have to keep in mind that stock value tends to rise over time, so it makes sense that it will act as an inflation hedge.
Not all stocks are created equal, though. When it comes to inflation, it’s a good idea to invest in shares from companies that have a global presence. This way, you get some security from the international market, especially if your domestic market experiences frequent financial volatility and inflationary cycles.
Related reading: How to Invest in Stocks: A Beginner’s Guide
Invest in gold
Gold has, for a long time, maintained its status as a good hedge against inflation — its value increases as the buying power of the dollar falls. The price of gold tends to increase when inflation is high and during periods of economic uncertainty.
Many investors view gold as an alternative currency, particularly in countries with currencies that are losing value. These countries will often use gold when their currency has failed. Consider Zimbabwe. The country launched gold coins in a bid to curb inflation that’s worsening its currency’s instability.
Exchange-traded funds (ETFs) are a good option for investing in gold. They are simple, convenient, and secure. You don’t have to own physical gold (no storage issues here), plus ETFs are more readily exchangeable for cash compared to actual gold bars and coins.
Stocks and gold hedge against inflation, but they work better when they are part of a strong investment portfolio. If you’re going to safeguard your financial future, diversification is key.
Diversify your investments
If you want to protect your money and increase your chances of building wealth, you should diversify. Simple.
Diversification means that you spread your capital over several financial instruments, assets, and industries. When you do this, you reduce the risk of major losses in the event of increased market volatility.
For example, inflation can have a negative impact on fixed-income instruments such as bonds. If your portfolio is diversified with instruments that hedge against inflation (e.g., stocks or gold), you can still reduce your overall risk.
Do note that diversification doesn’t eliminate all risk or guarantee no losses, but it’s a crucial element of minimizing risk and reaching your long-term financial goals. Need some help with diversifying your investments? Check out “How to invest securely with portfolio diversification.”
Avoid keeping excess cash
The biggest problem with holding a large amount of excess cash is that it won’t increase in value over time. When inflation hits, the buying power of that money goes down.
A better way to preserve purchasing power is to invest any excess cash and build a portfolio that serves your financial goals. Don’t forget to diversify, and don’t be afraid to consider non-traditional, alternative investment options such as cryptocurrency.
Investing may come with some risks, but it has the potential to generate returns — something you definitely won’t get when your money is just sitting around.
Inflation doesn’t have to mess up your financial future
Inflationary climates will always be part of your life as an investor. Rather than panic every time inflation hits, it’s better to hedge against it by making smart investment decisions.
It’s also important to support your hedging strategies with the right financial tools and resources that help you to invest and manage your money wisely. Chipper Cash can help you do all this.
Chipper helps young Africans to take care of their money and build their financial security with confidence and ease. You can hedge against inflation by investing in international stocks (there are over 6,000 U.S. public companies to invest in) or put money into other assets like crypto. What’s more, moving money is easy, secure, and super-efficient.
Over 5 million people trust Chipper to move money across Africa and beyond, enjoy free transfers and the lowest cross-border rates, and unlock global opportunities.You too can enjoy these benefits and more. Download the app on Google Play or App Store and start building the financial future you want.