Investment Strategies Amid Inflation: Instruments to Avoid

When choosing an investment instrument, investors must consider various macroeconomic factors, including inflation, which represents a continuous increase in the prices of goods and services.

Although inflation may seem like just a number, it significantly impacts purchasing power, is closely linked to banking interest rates, and serves as a key indicator of a potential economic recession. Therefore, understanding investment strategies during inflation is crucial.

The Impact of Inflation on Investment

Inflation is a critical factor to account for when making investment decisions. This is because investment returns can become meaningless if they fail to outpace inflation.

For instance, if you invest Rp1,000,000 in stocks during 2022-2023 and earn a 6% return (Rp60,000), but inflation rises 7%, your purchasing power actually decreases. Previously, Rp1,000,000 could buy 200 kg of rice, but with inflation, you would need Rp1,070,000 to buy the same amount.

During periods of high inflation, two key events typically occur:

1. Central banks increase benchmark interest rates (BI Rate in Indonesia)
2. Investors adjust their return expectations

For example, if investors previously aimed for a 6% return on stocks, they might now demand at least 8% to offset inflation. However, higher returns come with greater risk.

Investment Instruments to Avoid During High Inflation

1. High-Risk Investment Instruments

During inflationary periods, high-risk investments should be approached with caution, such as:

• Cryptocurrency
• P2P Lending
• Forex Trading
• Growth Stocks

High inflation often signals potential economic downturns, leading investors to avoid volatile assets. If investing in growth stocks, ensure that the company can withstand rising raw material costs and declining consumer purchasing power.

Many investors shift from high-risk assets to safe-haven investments, such as gold or short-term government bonds, causing the value of high-risk assets to drop.

High-risk assets, including long-term stocks and bonds (above 5 years), may also underperform during inflation. Therefore, investors often prefer short-term government bonds as a safer option.

2. Low-Liquidity Investment Instruments

During high inflation, investors should also avoid low-liquidity assets, such as:

• Real estate (land and houses)
• Collectibles (action figures, antiques, etc.)

Although property prices tend to rise in the long term, high inflation reduces consumer purchasing power, making it difficult to sell real estate at fair value. This can be problematic for investors who need quick cash.

Certain government bonds also have low liquidity, as they cannot be sold in secondary markets. While some offer early redemption options, they typically allow investors to sell only 50% of their holdings and only after a specific period.

Conclusion: Investment Strategy During Inflation

During inflationary periods, investment decisions must be made carefully. Experts recommend reducing risk by focusing on:
✅ Short-term bonds (under 5 years)
✅ Defensive stocks (stable companies across economic cycles)
✅ Safe-haven assets (such as gold)

High inflation often leads to higher interest rates and potential recessions. Therefore, investors should carefully balance their portfolios to achieve returns while minimizing risk exposure.

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