Would equity investing (stocks & mutual funds) protect you against hyperinflation?
If a given country were to go through a period of hyperinflation, would holding wealth in the form of stocks in individual companies effectively hedge the risk for an investor? Obviously there would be an impact on the financial results of the companies and a psychological effect on market valuation as a whole, but excluding those effects would the value and stock price of the companies rise with the inflation and offer some level of protection, or would you be just as bad off as the guy who held his wealth in cash?
Yes. The entire definition of inflation is that the price of things go up (Well, actually, that’s not really the definition, but that’s what most people think the definition is). So if you buy almost anything – stocks, gold, real estate, petrified wood, bubble gum, toothpaste, pretty much anything other than fixed rate bonds – then in a period of inflation, the price of that thing will go up at roughly the inflation rate.
Of course, not everything inflates at the same rate – some individual stocks might go up more than the inflation rate while others may go up less than the inflation rate, or even decline. But as long as you’re diversified across many different stocks, stocks are as good a thing to own in a period of inflation as anything else.
That’s one of the drivers of hyperinflation. People want to get rid of their currency as soon as possible since it’s constantly losing value. So they’ll buy whatever they can get their hands on, increasing demand for everything, which increases its price, leading to more inflation!
Also, due to inflation, any money left in the bank usually loses value, assuming the banks are not paying super high interest rates.
This means that few people will leave much money in their bank accounts, which means the banks won’t be able to write many loans, and will charge very high interest on those they do. This means it can be very hard to get loans when inflation is high, and the high interest rates are also, in themselves, inflationary.
If you just had hyperinflation, this would work. But you never just have hyperinflation. Hyperinflation causes financial chaos in general, and so any financial investment is going to be risky. If you’re really worried about hyperinflation, stockpile nonperishable food and other direct, tangible consumables.
In particular for stocks, if the company has a lot of fixed debt outstanding, they may benefit from the decline in the real value (i.e., liability) of their debt and see the stock price rise faster than inflation. Companies with large cash balances and little debt, might do worse.
Brings to mind a related idea that also gets brought up in hyperinflation discussions: invest in companies headquartered or primarily denominated in other currencies.
OTOH, as Chronos rightly points out, you hardly ever have just hyperinflation, so out of the country and/or stockpiling food and weapons is probably the better investment.
Depends how much money you’re trying to preserve. A bit of food and the like might be a good idea, but if you have the type of money that you’re thinking of putting into stocks, you can’t realistically buy and store all that food.
If you’re so convinced that there’s going to be hyperinflation, the best thing to do is load up with as much fixed-rate debt as you can. E.g. buy real estate with fixed rate mortgages.
There’s some truth in that, but the problem is that companies that have a lot of debt of any sort are generally going to need to refinance at some point, and that might be hard in a hyperinflationary situation. Companies with less debt might not have that issue.
Which is fine until the military junta a few years later confiscates your land, or the conquering armies take it for reparations, or local home-grown angry mobs just swarm it. That sort of thing tends to happen in countries with hyperinflation.
To be clear here, I’m not talking about large but ordinary inflation, like prices doubling in five years’ time. That, you can probably weather with a diversified stock portfolio and debt-financed real estate. I’m talking about hyperinflation, of the trillion-dollar-bill, wheelbarrows-of-cash variety.
I don’t know why you think your stockpile of non-perishable food is going to be more secure from conquering armies and local mobs than real estate. The opposite is true - eventually you’ll probably get your land back, but your supplies will be gone forever.
If you are worried about catastrophic, society-destroying hyperinflation, probably the best thing to buy is gold. At current prices, $1,000,000 worth of gold is approximately 40 pounds, equivalent to a cube about 4 inches on a side. Even broken into smaller pieces for convenience, this is quite easy to store and hide from ravaging mobs. And its value does not depend on the legal or economic system remaining intact.
The tradeoff is that, in good economic times, the value of gold can fluctuate quite a bit, and if the economic apocalypse never comes the price of gold may drop by a factor of 5 or so.
Well, with the food, you can lay low and hope not to attract much attention. But if it makes you feel better, feel free to include ammunition in the category of “tangible consumables”.
I don’t think laying low will help and ammunition won’t help either, against an army or even a mob.
The only thing that you can realisticly do in a circumstance like you describe is to keep your passport current and sock away your money in investment accounts in countries that are more stable. Then, if the going gets rough, head for the airport.