‘I got plenty of nothing‘
old Frank Sinatra song

But, would you really want to sing this melody one day when looking at your personal investment portfolio?

Watch out ! Inflation is coming after your money.

You noticed, not much has changed since last month. The world-wide mask debate is still full on, travel restrictions dampen our desire to simply go away to somewhere, and it is still safer to stay at home than to mingle with the crowds.

As result, the mind is forced to turn inside. To issues at home, the family or relations, and how to best cruise through the disastrous Covid time, which for many also involves scratching their head about money matters.

What happened this week to me in that respect may be interesting:

In Bali, where I already spent a happy 20 years by now, we have organisations, built and owned by local village administrations, called LPD (Lembaga Perkreditan Desa).
These are community based financial institutions which are not only functioning as financial enterprise, like common Banks do, but also aim to assist customary villages in Bali in carrying out their socio-cultural functions. – Which, as a happy Bali migrant, I don’t mind to support, especially because of some of the following benefits which, so far, made it nicely to my pocket.
Benefits, such as a high interest rates for deposit savings. Their interest is presently up to 7% p.a., depending on the term of the deposit agreement. (3, 6, or 12 month).
There is no 20% Government tax deduction, which at common banks is charged on the interest received. And another advantage is, should you need your money before the agreed term of the contract has reached, only a reasonable small penalty will be taken off your earned interest.
Furthermore, there is no reporting of client’s funds, or income from interest to any other entity (including the Tax Dept.)
You sure can see why I was happy to keep some savings in one of the larger LPD institutions.
Until now, that is.

Because there is a downside. Those LPD’s do not have access to the Indonesian Government Insurance System, which, in a common bank, covers your funds up to 2 M. IDR per account.

LPD’s are managed by friendly, but usually in finance matters not highly experienced personnel.
In today’s sad and virus-damaged situation, the ratio of assets compared to presently non-performing loans became a worry to me, because should a LPD go belly-up, we may end up with a claim in the LPD’s bankruptcy case, however, with little hope to see the money ever again.

They say: ‘Protection comes before investing’.
Tomorrow I go and ask my money back.
But then - what to do next?

Let’s quick check out some options. And

 let us not forget, although it is being hidden as best they can, most everyone is awake to the fact that prices are going up, and way up.

The good, bad and ugly about 

Many of us know full well that inflation is already here, and has been here for some time. Let’s see what to keep in mind right now, and also in the after-Covid-period, when inflation is predicted to increase even more.
Hey, wait! Of course, I also need to point out that these lines are part of UbudProperty’s monthly newsletter. Naturally, you would expect to read here about land, houses and business for sale. Well, not so precisely so today, although you will find a logical connection between inflation and owning a plot of land, a house, or other kind of investment.
BTW, do not worry, I am really not offended, if you take my following opinion with a grain of salt or scepticism. Would I be in the world of high finance, and able to give cracker advice on your personal finances, you’d have to come to Wall Street to talk to me. But obviously I am here in Ubud, Bali. Just a normal guy. My opinion is not formed at Harvard. Merely based on what I hope is common sense.
It is true, we still don’t know for sure, if rising prices will become the new normal, or if they’re just a temporary result of a nation very, very slowly emerging from a pandemic and a year of lockdowns and restrictions. In any case, we cannot ignore that all indicators point towards future higher inflation (at present about 4% in most Western Countries, same in Indonesia).
There are even warnings about looming hyperinflation, likely spreading from the US.
Drama for most, but also with opportunities for many of us.Absolutely guaranteed however, is, that a Euro, Dollar or Rupiah today will not buy the same value of goods in ten years.

• Be careful about holding cash. This is a big change for people who have come of age since 1981 or so - since then, holding cash has been a perfectly reasonable thing ...  Therefore –

The trend is anyway that National Banks, led on by their Governments, aim to reduce cash holding and -transactions for greater transparency and control of taxable income.
• Don't enter into long-term, fixed rate loans ...
• Invest in "stuff" rather than in money ...
• Invest for long-term capital gain ...

Should I buy into Tech-stocks now? They had some unbelievable increases, even up to 1000% in 2020. How can you not make a fortune this way?
However, Warren Buffet advises: ‘Tech stocks get hit harder during inflation tantrums, because they are “long duration assets.” So much of their growth is in the distant future that when discount rates in valuation models go up, the perceived value of tech stocks falls hard’.
OK. Advice heard. No tech stocks then. What else?

A 60/40 stock portfolio maybe? (A mix of traditional stocks and bonds with ‘blue chip’ stocks)
Unfortunately, if sustained, rising inflation is often not good for stock investors. The classic 60/40 stock/bond portfolio may get hit from both sides, as prices rise, both stocks and bonds can fall in price. In fact, a 60/40 strategy has historically returned around 9% a year, but closer to 2% during high inflation. Plus, stocks are not especially cheap, even before factoring in potential inflation. If you don’t want to do the work on your own, you can pay an investment advisor to assemble such a portfolio, however, the fees will be quite hefty.
That also puts me off. Next please…

‘Aaah !! Gold then’, the value-holding metal, as already proven over many centuries.

Gold has often been considered a hedge against inflation. In fact, many people have looked to gold as an "alternative currency", particularly in countries where the native currency is losing value. These countries tend to utilize gold or other strong currencies when their own currency has failed. Gold is a real, physical asset, and tends to hold its value for the most part.

However, gold is not really a true perfect hedge against inflation. When inflation rises, central banks tend to increase interest rates as part of their monetary policy. Holding onto an asset like gold that pays no yields is not as valuable as holding onto an asset that does, particularly when rates are higher, meaning yields are higher.
The only argument for investing in gold, even in cryptocurrencies, amid inflation is, that those assets are not damaged by the eroding value of cash.

(Dear clever reader, I trust you can already smell where this is going…)

But before, the‘Aha-moment’ comes, there are still COMMODITIES to be looked at.
Commodities are another suitable hedge against inflation. These are raw materials including oil, natural gas, precious metals, wheat and corn.

The Catch - there’s no such thing as free lunch. The risk is primarily that an inflationary episode is not sustained. If we don’t see a spike inflation, then commodities generally perform sluggish. Most of commodities’ returns have historically come during inflation. During non-inflationary periods, many commodities can even decline in value on average, based on past history. That’s not a setup for sound investment success.
So we also forget about this one.
Yes, you guessed right: Ahaaa! Real Estate (too good to come last, actually).
This is an asset, which will eventually benefit from inflation. Inflation does have a remarkably positive side when looked at from a property investment standpoint. Real estate is a popular choice not only because rising prices increase the resale value of the property over time, but because real estate can also be used to generate rental income.
As asset class Real Estate has intrinsic value, provides consistent income through its dividends and always was a natural inflation protector.
And if this would not already be enough, it is a feel-good-asset too. Beats the gold pot under the bed and any framed investment certificate hanging on the wall. According to location and type, you can even rightfully dream of coming years to spend on your pretty investment property. Standing there barefoot, on a day with sunshine and no wind, when you can listen to the growing grass (and value), holding a drink in your hand. Sounds about right? … and so easy to arrange. Simply WA our sales. Done!

Of course, one strategy is to stick with your existing portfolio.

Inflationary periods aren’t all that common. Roughly there was one year of high inflation in every 5, when looking back over decades. Strategies that work well during inflationary times, often perform poorly during other economic outcomes. As such there’s a risk of adjusting for something that is either temporary, or fails to play out as expected.
With any diversified portfolio, keeping inflation-hedged asset classes on your watch list, and then striking when you see inflation, can help your portfolio thrive when inflation hits.

Common anti-inflation assets include gold, commodities, and various real estate investments. I’m not sure, did we cover this before? 

Yet, the fundamental question remains as to what the recent run in prices means.
Is it normality starting to resume after the pandemic seems to slow down, as supply chains resolve their kinks after disruption? Or is what we are seeing now, the start of a more persistent inflation that is harder to beat?

History informs us how to invest during inflationary periods, but two questions remain: Firstly, how long this inflation lasts and, secondly, how high the inflation rate rises, if this is not the peak yet.
Again, watch out !
And do check out some of our recent price-reduced property listings.
Chances are, they never come like this again. Better be quick, I’m looking too :o )

With kind regards as always,
yours Ray
for the Team of UbudProperty