Does Equity help you beat Inflation?

Equity investments, such as stocks, have the potential to help you beat inflation over the long term. This is because equities represent ownership in a company, and as the company grows and becomes more profitable, the value of its shares can increase. This increase in value can provide a return on your investment that exceeds the rate of inflation.

However, it's important to note that equity investments can also be volatile and carry significant risk, particularly in the short term. The value of stocks can fluctuate based on a variety of factors, including economic conditions, company performance, and global events.

Let’s look at a few key things to know about how does equity help you beat inflation.

How does equity help you beat inflation?

• In order to beat inflation with equity investments, it's generally recommended that you hold them for the long term, rather than trying to time the share market or make short-term trades. 
• By maintaining a diversified portfolio of stocks and holding onto them over a period of years or even decades, you may be able to achieve returns that exceed inflation and help you build long-term wealth. 
• Additionally, dividend-paying stocks can provide a regular income stream that can help offset the impact of inflation on your portfolio.
• Now let’s understand what inflation is, what are its causes & how to measure it.

What is inflation?

The rate at which the average cost of services & goods in a country's economy rises over time is known as inflation. To put it another way, it is the gradual loss of a currency's buying power, which means that a certain amount of money can purchase lesser goods & services in the years to come than it did in the past.

What causes inflation?

1. A rise in the need for goods & services, a fall in the supply of those goods & services, or a rise in the cost of production are just a few of the variables that can lead to inflation. 
2. Government measures, including fluctuations in the interest rate or cash supply, may also have an impact.

How to measure inflation?

The Consumer Price Index (CPI) & the Producer Price Index (PPI), that monitor the prices of products and services at the consumer and producer levels, respectively, are two common indicators used to measure inflation. 

A high rate of inflation can be bad for an economy because it lowers purchasing power, raises borrowing costs, and leaves consumers and businesses uneasy.

Going ahead, let’s understand how inflation can affect our savings.

How inflation affects money or savings?

How inflation affects money

Inflation leads to the overall rise in rates of products and services over a period of time. Consequently, as the expenditure of living increases, you need to have more money for more purchasing power. 

When inflation is excessive, money loses value quickly and costs more to buy the same products and services that were previously available for less. Inflation can have a variety of financial effects. For instance, inflation can gradually reduce the value of cash savings that aren't yielding any interest. 

In other words, as inflation rises, your money has less purchasing power. Additionally, over time, inflation can lessen the monetary value of an income stream that is fixed, for example a retirement savings plan or a bond.

How inflation affects savings

Inflation can have an impact on savings as well. The interest rate you receive on savings in a bank account could not keep pace with inflation. As a result, even if your funds are increasing, they might not be doing so quickly enough to keep up with inflation. Bonds and stock investments, among others, can be impacted by inflation. 

These investments may lose value when inflation is strong because investors need a higher rate of return to make up for their money's declining purchasing power.

In general, both money & savings can be significantly impacted by inflation. Over time, it can diminish the actual worth of money and lessen the buying power of income and savings. When making financial decisions, it is crucial to take inflation into account. 

You should also take precautions to protect your wealth from inflation's consequences, such as putting money into assets that typically perform well when inflation is high.

Now let’s understand whether your savings are actually beating inflation or not.

Are your savings beating inflation?

Your savings beating inflation totally depends on two factors. Firstly, the rate of interest of your savings account & secondly, the overall rate of inflation. It is crucial to keep in mind that interest rates on savings accounts are often quite low and could fail to keep up with inflation. Other investment options, such as equities, bonds, or real estate can give larger returns. They come with higher risks but they have a good potential to overcome inflation. 

Before making any investing decisions, it is always advisable to speak with a financial counselor.

How do Equities beat inflation?

Equities beat inflation by potentially providing returns that exceed the rate of inflation over the long term. This is because equities represent ownership in a company, and as the company grows and becomes more profitable, the value of its shares can increase, providing a return on investment that may exceed the rate of inflation. 

However, equities can be volatile and carry significant risk, particularly in the short term. It's generally recommended to hold them for the long term, maintain a diversified portfolio, and carefully examine investment objectives, tolerance for risk, and time horizon. 

Additionally, dividend-paying stocks can provide a regular income stream that can help offset the impact of inflation on a portfolio.

How consistent is Equity in beating inflation?

Over the long term, historically, stocks have a tendency to deliver returns that are larger than inflation. Nevertheless, there is no assurance that stocks will continue to outperform inflation in the long run.

Several variables, such as economic expansion, interest rates, business earnings, and investor perceptions, among others, have an impact on how well stocks perform. Equities prices and returns may fluctuate due to these factors' unpredictability and fast change.

Additionally, even though stocks may offer longer-term gains that are higher than inflation, they also carry a higher amount of risk. Equities trading using a stock market app can have a higher amount of risk than other sorts of investing since individual stock values can fluctuate and are influenced by market conditions.

Despite the fact that historically, over a long period of time, shares have outperformed inflation, it is vital to remember that previous performance is no guarantee of future outcomes. Before making any investing decisions, investors should carefully examine their investment objectives, tolerance for risk, and time horizon. To minimise risk and maximise rewards, it's crucial that you distribute your financial portfolio across various asset classes.

Conclusion

• Equity investments, such as stocks, have the potential to help beat inflation over the long term.
• Inflation is the gradual loss of a currency's buying power, which means that a certain amount of money can purchase lesser goods and services in the years to come than it did in the past.
• Inflation can reduce the value of cash savings that aren't yielding any interest and lessen the monetary value of an income stream that is fixed.
• Bonds and stock investments can be impacted by inflation, and they may lose value when inflation is strong because investors need a higher rate of return to make up for their money's declining purchasing power.
• Interest rates on savings accounts are often quite low and could fail to keep up with inflation, which means that other investment options, such as equities, bonds, or real estate, can give larger returns.
• Over the long term, historically, stocks have a tendency to deliver returns that are larger than inflation, but there is no assurance that stocks will continue to outperform inflation in the long run.
• To minimise risk and maximise rewards, it's crucial that you distribute your financial portfolio across various asset classes.
• It is always advisable to speak with a financial counselor before making any investing decisions.

Disclaimer

*Terms & conditions apply. This is an informational message from blinkX and is not intended to be an investment recommendation. Securities market investments are exposed to market risks; before investing, thoroughly read all pertinent documentation.