The column “René wants profitability”: Germans fear inflation, but love interest rates: find the mistake!

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There are good reasons to fear inflation. It increases inequality and devalues ​​our money. But the consequences can be reduced with the right investment strategy, if you think a little differently.

Pre-war inflation, climate change and recession: these are the results of a survey on the fears of the German population that I recently found (see bar chart). At first I wasn't surprised. We read time and again that in Germany we are especially sensitive to high inflation figures. Experts explain this with the hyperinflation in the Weimar Republic, which was burned into the collective national memory. Whether true or not, there are good reasons to fear inflation. It increases inequality and devalues ​​our money. Then we can afford less with our savings.

The survey conducted by asset manager Flossbach von Storch together with the GfK survey institute also asked what inflation expectations are for the next two or three years. Most participants said “between four and six percent.” So that's a lot. To put it in perspective: with a six percent inflation rate, money after twelve years is only worth half as much.

The next question was how the respondent would invest 100,000 euros for ten years. And now it comes: 13 percent said the answer was savings account or daily money, 18 percent said fixed-term deposits and five percent even mentioned checking account. I asked myself: How does this fit? If I'm afraid of inflation, why don't I invest differently?

Interest Rates Rarely Outpace Inflation

To understand my confusion, it may be important to first address the difference between nominal and real. This can be explained quite well by a salary increase: if your income increases by three percent, you will receive a nominal three percent more salary. Actually, that doesn't sound bad. But now the inflation rate is four percent. How much is left after deducting inflation? This is your actual salary increase. In this example it is minus one percent. In other words, prices have risen faster than their income.

About the author Clemens Schömann-Finck

Clemens Schömann-Finck is a financial expert and is behind the YouTube channel “René wants profitability”. In his FOCUS Online column he highlights current issues related to the stock market and investing. He subscribe to his newsletter here for more financial information.

The same goes for savings: the amount you have in your account increases as you earn interest. But if the inflation rate is higher, the real interest rate is negative, so the value of your money still decreases. You can afford less if you retire it.

Of course, in principle there would be nothing wrong with investing with overnight money, etc., if interest rates were high enough. But in the vast majority of cases this is not the case. Even in the days of the German mark, real interest rates were predominantly negative. This did not occur only with the monetary policy of the European Central Bank. Things usually go a little better with fixed-term deposits. But the difference between interest rates and inflation is not great there either.

What irritates me the most is: if as a saver I am afraid of inflation, then I have to choose an investment that at least maintains my real capital. Or better yet: an investment that really increases my assets.

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In the stock market, risk is a matter of strategy

There is this investment: stocks. Unfortunately, many savers do not see this opportunity: “speculation” and “risk” were the most mentioned in the survey in response to the question of what terms are associated with stocks. Long-term investing has nothing to do with speculation. It's about investing in companies. Shares, like real estate, are therefore a material asset. And perspective on the issue of risk is also difficult. Then, almost 60 percent of respondents said they were not even willing to accept a small loss within a year (after all, the choice of savings accounts as a preferred investment fits with this).

In my opinion, this is a misinterpretation of risk. The way I look at risk is that I have less money available than I need at any given time. This means: if I need the money in a year to pay off a loan, I can't risk a loss. The money belongs to the account. But if I only need the money invested in ten years, why would a loss in the first year bother me? The main thing is that in ten years I will be in positive numbers. And that's precisely why the opportunities in the stock market are so great, as a look back shows: Looking back, a broadly diversified stock portfolio has offset any setbacks over time.

This means: if as a saver I am afraid of inflation – and there are good reasons for this – then the answer is not to put the money in a savings account. Instead, I have to look for an investment whose returns consistently exceed inflation. This is possible in the stock market. You don't even have to be a good investor to do this. Even with a simple ETF on the global stock market it is possible to obtain a sufficiently high return. The MSCI World has risen an average of 8.4 percent annually since 1988.

Enough to beat inflation, except in exceptional cases. Of course, there were also bad years when the value dropped. As long as you don't need the money, it's not really a problem. You just have to have the courage and the time to overcome this phase. Anyone who has recognized this has less to fear from inflation.

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