There’s been a lot of talk in the news about inflation in recent months. This invisible force works silently in the background, reducing the value of the cash in your pocket and the money in your bank account. In doing so, it drives up the price of just about everything you want to buy.
In 2021, the annual rate of inflation in the United States rose to an average of 4.7%, but by February 2022, it had rocketed to 7%. For context, the annual rate in January and February 2021 was 1.4% and 1.7% respectively, so that’s a 500% rise.
That means that prices were 7% higher in February 2022 than they were at the same time the year before. That may not sound like much, but when you compound it over just a few years, things begin to escalate. For example, a $100 product would cost $140 in five years time if inflation remained at 7%.
Traditionally, Average Joes have put their money into savings accounts to protect their nest eggs from inflation, but in recent years, banks have been offering a pittance to savers, with interest rates of around 0.1%.
This is why more and more everyday people have begun looking to invest as a way to hedge against inflation. Thankfully, new apps and websites have made it easier than ever to gain exposure to financial markets at little or even no cost. But with so many investing options, it can be quite confusing to a novice. So, if you’re thinking of taking the plunge, here are some things you may want to consider first.
Additional Resource: How to get the best financial advisor?
Make a Plan
Blindly buying shares in companies without understanding what they do or what you want to achieve out of your investing is a recipe for disaster. This shouldn’t come as too much of a surprise to you. Having a plan or a strategy is usually a good idea for most things in life, whether it be your career, your holiday, or a party.
Many people who play games even use strategies to structure their approach. For example, key Fortnite strategies can include being selective over who you engage with and stockpiling resources. Similarly, there are strategies like the Martingale System in roulette that add structure to the way players place their bets.
If you’re looking for an investing strategy, you’ll want to be careful. There is a saying that, during a gold rush, the people that make the most money are the ones that sell the shovels. Some link it to the 1848 discovery of gold in California and the subsequent rush of people that travelled to the state to try and find their fortune in the ground.
In the 21st century, the shovels come in the form of business and investment strategies, so it can be very difficult to separate the wise advice from the swarm of sales pitches.
You almost certainly don’t need anything complicated, especially if you are a complete novice. Instead, it’s better to follow the advice of successful investors, like Warren Buffett, who suggest most people should focus on simple and low-cost index funds.
Don’t Go All In
When the market is going up and you’ve had some early success, it can be easy to fall into the trap of wanting to maximize your gains by piling even more of your money into the stock market.
But it usually pays to spread out your investments. This allows you to take advantage of dollar-cost averaging, a process that involves removing the risk of long-term market volatility by making smaller regular investments rather than one large one.
Many financial advisors also recommend that you should also keep a certain amount of cash in reserve. This will come in handy if you ever get an unexpected bill or you lose your job and need some cash without having to sell your investments.
Don’t Get Emotional
The stock market goes up, which is great. But it also goes down. It can be easy to let emotions take over when either of these happen, especially if the market enters a correction. However, it usually makes more sense to stick to your investing strategy, especially when share prices are cheap.