How to beat inflation through investing

Posted at 07/26/14 7:11 PM

MANILA, Philippines – A wealth manager describes inflation as a "silent termite" that erodes a person's savings and investments.

But while inflation is something that's beyond investors' control, there are investment strategies that can be employed to beat inflation.

“The way to beat inflation is to come up with a portfolio that’s made up of several things, some of them less than inflation, some of them higher than inflation,” wealth manager Mario Miranda told ANC’s “On The Money.”

Miranda said a typical portfolio would be 10 percent in money market fund, earning 1 percent; 70 percent on corporate bonds that earn around 4.5 percent; and 20 percent in the stock market.

Miranda noted that average return in the stock market in the last 10 years has been about 20 percent, with a conservative outlook of about 10 percent.

“If you look at a portfolio of 10 in money market, 70 percent in bonds, and 20 percent in stocks, that would come up to be about 5 and a quarter net, so that’s a portfolio that would be beating inflation as of this time,” he said.

However, Miranda noted that this sample portfolio is for someone who is “above average” and “moderately aggressive.”

A slightly average person will be barely beating inflation while a conservative person, who most likely will not invest in stocks, will be below inflation.

“A portfolio has to be tempered by the customer suitability test so you will know the risk aversion is,” Miranda advised.

“I am trying to make people unlearn that you need to be conservative as you grow older. Your risk profile may evolve because you get wiser as you get older and understand the risks better,” he added.

Miranda explained that inflation and interest rates affect bonds because bonds “are driven by the fact that they promise to pay a fixed rate of interest and as such, their price actually changes as interest rates go up and down.”

The stock market is likewise affected by inflation and interest because interest from borrowings is a major factor in a company’s profit or loss.

The difference between inflation and interest is that inflation is backward-looking while interest rate is what investors earn in the future.

Miranda noted that the struggle is that you have to protect inflation in the future and find interest that’s hopefully one or two percentage points higher.