How to Invest for Deflation
When people think about the economic factors that could affect their investments, deflation hardly comes to mind. That’s because most people are fixated on the consistent rising prices. Very few people tend to think about the prospect of falling prices in our economy. However, it is always smart to be prepared during any market condition. Here, we will look at what deflation is and how to properly invest when prices are falling.
What is deflation?
Deflation is an event where prices across the economic spectrum fall due to less demand. During deflationary times wages fall which causes less demand for discretionary items such as electronics, vehicles, real estate, and luxury goods. Therefore, the economic landscape experiences downward pressure on prices. Deflation is rare in our modern world. In fact, the last time the United State experienced prolonged deflation was during the Great Depression from 1930 to 1933.
Recent example of deflation
A recent example of deflation took place in Japan during the 1990s. After the dramatic rise in the Nikkei stock index and Japanese real estate, the entire market in Japan experienced a “Lost Decade.” The Nikkei fell by 80% while Tokyo real estate prices fell by 90%.
3 Ways to invest for deflation
During times of deflation, you will want to get defensive with your investments. Here’s a look at three ways to protect your purchasing power during times of deflation.
1). High Grade Bonds
You will want to play if conservative during times of deflation. There is perhaps no safer investment than high grade bonds. That includes AAA rated corporate bonds as well as United States Treasury Bonds. These bonds will pay an interest rate that is virtually guaranteed. Since collecting a reliable income will be rare in deflationary times, high grade bonds offer an excellent opportunity.
2). Consumer Goods Stocks
During times of deflation, people will still need to buy consumer staples such as toilet paper, food and cleaning supplies. Therefore, you will want to consider investment in consumer staples such as Johnson & Johnson (JNJ), Clorox (CLX) and General Mills (GIS). Also, you can own a basket of consumer staples stocks with the Vanguard Consumer Staples ETF (VDC).
3). Certificates of Deposits
Finally, holding money in the bank becomes an attractive choice. You may want to consider putting your cash in a Certificate of Deposit or (CD). With a CD, your cash is locked up for a period of time from 21 days to 10 years. During that time, you cash collects interest. The longer the CD, the better the interest rate. CDs are available at just about every bank and credit union.
Keeping your portfolio safe in deflationary times
Deflation can be a scary time for investors. Therefore, it is a good idea to have a plan in place in case prices begin to fall. Consider these three top ways to protect your money during times of deflation and you may be able to keep your purchasing power intact.
REFERENCE:
https://www.investopedia.com/articles/basics/11/guarding-against-inflation-deflation.asp
