Financial Adviser: 5 Smart Investment Strategies to Protect Your Hard-Earned Savings from Rising Inflation

The Philippine Statistics Authority (PSA) recently reported that the national inflation rate has accelerated to 4.2 percent in January 2020, the highest ever recorded since 2019. Inflation increased last year from 3.3 percent in November to 3.5 percent in December.

The latest inflation result was more than expected, prompting the market to speculate that growing supply problems may increase inflation further until the first half of the year. This is why you need investment strategies to keep up with inflation.

Rising inflation is seen as undesirable in general because higher prices can hurt if you live on a fixed salary or have limited savings in the bank. Inflation diminishes your buying power because higher prices mean you have to spend more for the same goods and services.

Although inflation can be a good indicator of a recovering economy, your income and savings must also grow and catch up with the general increase in prices. How should you manage your savings to stay ahead of inflation? Where should you put your money?

Here are the five investment strategies everyone needs to know to minimize the impact of rising inflation on your savings:

1| Invest in growth stocks

Investing in stocks has historically provided higher returns than fixed income investments and is one great opportunity to build wealth over time if you are looking to grow your savings for the long-term.

With the PSE Index recovering from the crash last year, there are a number of stocks that you can already buy at reasonable prices. Of course, earning higher returns from stocks do not come without higher risk.

There will always be risks that market may fall again and you may experience paper losses in your portfolio. In order to lessen your risk of making mistakes, stick only to stocks that have a reliable track record of profitability and stock performance.

Some of the stocks that you can buy are PSE Index stocks that have historically outperformed the market in the past such as SM Prime (PSE: SMPH), Jollibee (PSE: JFC), Metrobank (PSE: MBT), Ayala Land (PSE: ALI) and Puregold (PSE: PGOLD).

You can also buy stocks with promising growth outlook. Stocks like Ayala Energy (PSE: ACEN) and Fruitas Holdings (PSE: FRUIT) can be good investments for the long-term.

2| Invest in Exchange-Traded Funds

If you think you don’t have the skills in stock picking, a good investment strategy is to also invest in Exchange-Traded Funds or ETFs, which simply tracks the PSE Index.

The only listed ETF you can buy in the market is the First Metro Philippine Equity ETF (PSE: FMETF).

If the stock market is down today, it will always recover in due time. If you are invested in the equities market as a whole, your returns in the long run should beat inflation.

The PSE Index has historically generated seven percent return per year since 1986 but during the last 10 years, the PSE Index grew by an annual compounded rate of 10 percent.

Over time, stocks will always beat inflation because companies will raise prices to account for rising costs. This increases revenues and earnings, which lead to higher share prices in the future.

Because ETFs follow the PSE Index, you are assured that the fund contains only the bluest of the blue chips.

3| Invest in high dividend yield stocks

Investing in stocks is not only about making money from share price appreciation. You can also earn regular cash dividends from stocks that offer returns higher than inflation.

Remember that as share price goes down with weak stock market, dividend yield increases. At current level of the PSE Index, there are a number of stocks that offer relatively high dividend yields.

Choose stocks with a good dividend history. Dividends that increase every year are indicative of healthy earnings growth. Utility stocks are traditionally stable and known to be generous dividend payers.

Blue chip stock such as Meralco (PSE: MER) and Globe Telecom (PSE: GLO) currently offer a dividend yield of about 5.2 percent while SPC Power (PSE:SPC), another utility stock, offers a yield of 7.8 percent.

If you are more conservative, you can also invest in preferred stocks, that pay fixed dividends, similar to a bond paying interest income.

Some of the preferred stocks that have high dividend yields are San Miguel Corporation (PSE: SMC2B) at 7.5 percent, Megawide Construction (PSE: MWP) at 6.9 percent and Phoenix Petroleum (PSE: PNX3A) at 7.4 percent.

4| Invest in real estate properties

There are two ways to beat inflation by investing in real estate. One is by simply investing for capital appreciation. For example, you can buy an idle lot whose value you expect will increase in the coming years. 

Depending on the demand for property in the area, the compounded annual increase in value of the land should enable you to beat inflation rate in the long run.

The other way is by investing in rental-paying properties. You can invest in a property that pays annual rental yield that is higher than inflation.

For example, you are planning to buy an apartment for investment. Before you finalize your purchase, make sure that the rental you will charge will give you yield that is better than inflation and that the monthly rental you will ask for is according to market in the area.

But if you don’t have the capital to buy property for rent, you can just buy Real Estate Investment Trusts (REITs) in the market that distributes at least 90 percent of its annual rental income.

The only REIT listed in the PSE is Ayala Land REIT (PSE: AREIT), which currently pays about 4.8 percent at current market price.

Unlike preferred shares, which pay fixed dividends, dividends from REITS can increase as asset base of the REIT company grows.

AREIT’s share price has increased by 21.8 percent from its IPO price last year as the company acquired more assets to increase its rental income.

5| Invest in alternative investments

If you want to diversify your investments, you can also try to invest in precious metals such as gold.

Gold prices have historically had a positive correlation to rising inflation, which means that when inflation rises, demand for gold also increases.

This is because gold has been traditionally considered as an inflation hedge that can help you preserve the value of your savings for a long period of time.

Rising inflation in a low interest environment can result to negative real interest rates. For example, if current money market rates pay only two percent per annum and inflation is four percent, it means that your savings is losing two percent per year in purchasing power.

Investing in gold is a good investment strategy that can help you protect such erosion in buying power because gold prices tend to increase with rise in inflation.

If you are in the digital space, you can also consider investing in Bitcoin. Like gold, Bitcoin is also perceived as an inflation hedge mainly because of its limited supply.

Although not regulated by the Central Bank, major payment service providers are now slowly accepting Bitcoin as alterative currency. As more people use Bitcoin, the higher its price will be in the future.

Henry Ong, RFP, is president of Business Sense Financial Advisors. Email Henry for business advice hong@businesssense.com.ph or follow him on Twitter @henryong888