this is the contradictory advice on investment that is being given at the moment

When looking for advice on investment at this time we will surely run into two contradictory aspects: you have to be 100% invested because inflation is coming; Or, you have to have cash, because an imminent stock market correction is coming. What can we trust?

Let’s explain both postures and try to reconcile both in an investment strategy that protects us from inflation while not leaving us at the mercy of a stock market crash. Both situations can impact savings and it is better to be protected.

Inflation is here

We have been talking for many years about the inflation that could come from the lax monetary policies of the central banks. Although many economists have changed their position on the impact of an expansionary monetary policy on inflation, the truth is that we have inflation again.

Precisely the latest data published yesterday by the INE places annual inflation in Spain at 5.6%, the highest figure since 1992. This implies that a person who has his savings in an unpaid checking account has lost 5.6% of his savings in the last year, since money today has less purchasing power than a year ago.

Therefore, to protect yourself from inflation, the sensible thing to do is invest. And if inflation starts to be high (as we are seeing), the more invested the better. Investments in the stock market protect us from inflation because if they are well diversified, to avoid sectoral or specific problems of any company, historically the stock market offers returns above inflation.

Therefore, in the face of a real problem that is already here and we do not know exactly how it will evolve in the coming months, the advice would be to be 100% invested, leaving only in cash a capital necessary for emergency expenses.

The stock market correction

However, many analysts indicate that the stock market is expensive. The multiples at which stocks are usually measured (price / sales) are excessively high, which means that could indicate a correction is on the way.

This claim, however, has been going on for many years. In fact, before covid-19 there was a lot of noise about a possible correction, which came when the crisis arose, but the recovery has been very fast.

Active vs passive management funds: there is a third way

In general, bears always have the upper hand because historically stocks tend to rise, but it is also true that investing at the wrong time could bring us many years of suffering.

Which is the right way?

The truth is that we have a certainty and that is that we have inflation. And an uncertainty, which is what the stock market is going to do. For me the certainty has more weight, which in this case are the losses that we are going to bear for not being invested.

However, I also do not want to dismiss the possibility of a stock market correction. I think the logical thing to do is protect yourself and for this there are several strategies: one would be not to be 100% invested or to take a defensive position, such as the permanent portfolio (which already maintains a percentage in cash).

Where does the money that is given to Nobel Prize winners come from?

Another option is to invest but not everything in the stock market. For example, some index funds offer a mix between equities and fixed income. Given the uncertainty, a greater weight of fixed income is better as protection against a stock market correction.

As we always say around here, try to do market timing It is a mistake in investment and the best thing is, whenever we have money available to invest, to do it. Then we must be patient, because the results come in the long term, and always with a mix of equities / fixed income in accordance with our aversion to risk


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