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The last couple of years has certainly had a big impact on many aspects of the world. Almost every day brings significant news from all around the world, and this has obviously impacted the state of the world’s economy.
For the past couple of years, the world has been going through a turbulent time. These years will certainly be remembered because they have had such a big influence on so many aspects. When it comes to economics, inflation has increased more and more, skyrocketing in 2022.
How to Beat Inflation Through Fixed Income Products?
A quick recap on inflation
Before we continue to discuss how to beat 2022 inflation, we need to make sure that everyone knows their economic terms. So, what does inflation actually mean? Inflation is a rate of increase in prices over a given time. It is often measured in a broad manner. Inflation rarely impacts just one specific thing. On the contrary, it affects everything from the price of buying groceries to the price of houses.
Even though inflation has an effect on all prices, it is often marked by the price of milk in many countries. This is simply because the price of milk is relatively low, and it is a very common product, which makes it easy for everyone to understand.
There are different reasons for inflation. These can be categorized into two groups; demand-pull inflation and cost-push inflation. The specific reason for any kind of inflation depends on the time. For example, inflation in 2022 has been mainly caused by the increase in the money supply, worker shortages, rising wages, and supply chain disruption.
What are fixed-income products?
Now that we are sure what inflation means, and what causes it, we can move to ways to beat it. This part will begin with introducing fixed-income products. The purpose of fixed-income products is to offer depositors a fixed return. This return will depend on the conditions of the market.
The conditions often maintain 80%-90% of their value, which means that the depositor can earn returns paid on a steady basis. This will happen even if the underlying market will drop. Because of this, inflation doesn’t necessarily have the same impact on it, as it does on other aspects. Also, since inflation raises the prices, it naturally raises the value. So even though fixed income doesn’t react as much to inflation as many other products might, the reaction can also be positive.
What is the risk level with fixed-income products?
The truth is, that depending on the point of view, inflation can be negative or positive. Still, regardless of the view, it is certain that 2022 inflation is having drastic consequences. For example, in Canada, inflation is at its highest in 31 years.
Inflation of this size will have effects. Because of this, it is even more important that different risk levels are taken into consideration when one is considering a new investment. When it comes to fixed-income products, there are various options for different risks that will affect the product. Namely, the most important risks to be aware of are issuer risk and market risk. Issuer risk means that the investment provider will go out of business. Market risk on the other hand means that the underlying market falls below the barrier.
Professionals can be helpful when designing your portfolio
If all this was a bit difficult to understand, or you are not sure how to handle those risks, it is a good idea to ask for professional help. There are many financial advisors who are specialized in this area. With their help, you can make educated choices, and find the best options to beat the 2022 inflation.
