Believe it or not, monsters under the bed have got nothing on raging inflation! Like the true beast it is, inflation lowers the standard of living, eats into your earnings, and reduces the purchasing power of your hard-earned money.
At present, UAE residents are certainly feeling the pinch of the global cost-of-living crisis as fuel prices continue to spike. So, with inflation driving up costs and chipping away at your finances, how can you, as a prudent investor and smart consumer, protect yourself?
Here are four simple ways to navigate a high-inflation market:
- Examine Your Finances
- Change Your Lifestyle Habits
- Invest in Inflation-proof Assets
- Diversify Your Investment Portfolio
UAE Inflation At A Glance
The UAE is currently experiencing rising inflation due to Covid-19, and geopolitical pressures, resulting in higher transportation costs and food prices.
Petrol prices in the UAE have jumped over 74 percent since January 2022 as a result of increasing global crude oil prices, primarily after the Russia-Ukraine war in February. As of this month (July), it costs Dh4.63 per liter for Super 98 petrol, compared to the January rate of Dh2.65 per liter.
Clearly, we’re in for a pretty bumpy ride, and that’s exactly why you need an action plan to combat the rising rate of inflation and still prosper financially.
1. Fine-Tune Your Finances
During periods of inflationary pressure, it’s important to find ways to tweak where your money goes. That’s why you should prioritize budgeting and tracking your expenses, as it helps you see the bigger picture, spend intentionally and be more strategic with your finances, especially if you’re an overly casual spender.
For example, you could reduce the number of streaming service subscriptions, or re-negotiate your mobile phone plan. Additionally, it would be wise to reduce your loan repayment obligations by either pre-paying the amount due or refinancing. Loan repayments typically constitute some of the largest expenses in anyone’s outgoing costs as interest rates correlate with rising rates of inflation.
So, carry out a regular financial audit and examine your finances to make any necessary adjustments. While you’re at it, it’d be worthwhile to review your emergency fund and ensure you have at least three months’ worth of expenses in case of any unforeseen circumstances.
2. Change Your Lifestyle Habits
Inflation affects your cost of living by increasing the cost of goods and services, more so if you’re living on a fixed income. For instance, when you head to the grocery store expecting to spend a specific amount of money on an item, only to spend a lot more, you’ve experienced inflation.
Nowadays, rising petrol prices have prompted UAE residents to embrace more sustainable and practical lifestyle changes to save up on fuel costs. This includes adopting other means of transport, as many motorists take to carpooling, public transport, and bicycles.
In this ever-evolving and tech-driven world, you could also improve your chances against inflation by investing in yourself, so make use of your talents, upskill, and enroll in classes for education and personal development.
3. Invest in Inflation-proof Assets
One way to inflation-proof your portfolio is to invest in assets that are likely to hedge against inflation, while also avoiding those that tend to be especially hard hit. After all, if the billionaires are doing it, why shouldn’t you? Here are a couple of examples to consider:
Real estate investments are a boon in inflation, since rising inflation contributes to rising prices, meaning rising rental rates. This causes an increase in net rental income, which appreciates property values further.
Given that this value is higher than the inflation rate, then a real estate investor’s portfolio would not be hampered. That said, rental income from real estate investments typically keeps pace with inflation and, in key locations like Dubai, they even beat the inflation!
However, depending on the property, as well as the demand and supply of the market, different assets will perform differently. SmartCrowd is a good place to start as our platform offers prime, high-yielding Dubai rentals, which outperform the Dubai real estate market by a sizable margin!
Why not add gold to your investment portfolio? Gold has often been regarded as an effective hedge against inflation, as it is a real, physical asset, and tends to hold its value for the most part.
In fact, many people have looked to physical gold as an alternative currency, especially during times of financial uncertainty, political tensions, and high inflation. So, if you’re looking for exposure to gold, consider gold exchange-traded funds (ETFs), offered by mutual funds. And, instead of buying physical gold for investments, you can find these ETFs listed on exchanges like shares, where they can be bought and sold.
4. Diversify Your Investment Portfolio
Tying with the previous point, the importance of diversifying your portfolio, especially during periods of inflation, cannot be stressed enough. Diversification is a risk management strategy, where you invest in a variety of different assets, reducing your chances of incurring major losses.
With the rising rate of inflation, a diversified portfolio can stand a better chance of delivering a more stable financial performance compared to a poorly-positioned portfolio of undiversified assets. So, now’s the time to spread your eggs across different asset baskets, such as gold and real estate, and hedge your portfolio against inflation.
The Bottom Line
We might not all understand inflation, but we definitely all experience its wrath! Still, the truth about the rising rate of inflation is that it’s ultimately a natural aspect of the global economy which we must learn to embrace. And with the Fed also facing pressure to bring down inflation by increasing interest rates, the US will be passing through a critical phase – impacting other dependent economies. That’s why it’s important for long-term investors to manage their finances and have a solid investment strategy to proactively hedge their portfolios against through-the-roof inflation.
Though some of the adverse effects of inflation are still somewhat unavoidable, you shouldn’t underestimate reviewing your finances, implementing lifestyle changes, investing in inflation-resistant assets, and diversifying your portfolio.
At SmartCrowd, we give you the opportunity to diversify and invest in the Dubai real estate market, so you can earn a steady, risk-adjusted income. We’ve outperformed the market by scouting desirable, high-yielding investment opportunities in Dubai’s key areas, enabling you to build a diversified portfolio based on your risk appetite. Rest assured, with SmartCrowd, your portfolio will always deliver!
Disclaimer: This blog is intended solely for educational purposes and shouldn’t be treated as financial advice. We suggest you always conduct thorough research, perform your own due diligence and consult with financial advisors to assess any real estate property against your own financial goals.