The LML Group Hong Kong: Inflation Investing due to QE2
This whole mess in the USA Federal Reserve with the Quantitative Easing part 2 or QE2 makes me wonder how to go about investing some cash which will be eaten away by the immense inflation about to come. Well my friend Dave of the LML Group in Hong Kong has this opinion about inflation investing:
Many people do not invest because they have the fear that they would be making wrong decisions which may lead them to lose money. They are not alone; many people have the same fear. However, getting to know more about personal finance and investment, the faster we will realize that the biggest mistake is being too cautious, or worse, doing nothing at all with your money. Inflation is the threat to long-term financial security.
Inflation takes away valuable parts of your capital – the money that you currently have. If nothing is done with your money, you will lose purchasing power over time. In the long run, its value, when measured against the purchasing power of that time, will be much smaller.
The only real way to beat inflation is with growth, which increases the size of our inheritance. This growth will be achieved only if our investment’s growth rate is faster than that of inflation. Investor’s do not need large amounts of money to be successful. It can be with smaller funds, which can be invested in equities. You actually need to see how it is possible by building an appropriate investment strategy.
Diversification is the key against the risk
In investment, the easiest way to reduce risk is through the planning and formation of a diversified portfolio, by diversified we refer to the investments behaving differently from one another in the same scenario. For example if we invest mainly in debt schemes, they will not benefit from a rising stock market. On the other hand, if you are investing in shares, the value of a portfolio will decline significantly in market cycles, but can be recovered over time with new prices.
But in a diversified portfolio it is appropriately balanced. The worst thing is to have our money in a single scheme and accidentally make serious mistakes during tense situations such as declining market.
Volatility lessens with diversification.
Investment: Risk is defined as the possibility that our money will not get expected returns or may even decrease in value. Risk equals volatility: Each scheme has an associated risk that is important to know before investing. It is imperative to note here that the greater our range of investment prospects, the lower the effects of volatility or risk associated with our portfolio.
The LML Group, Hong Kong