hello everyone,

have a query w.r.t type of assets that one would prefer to hold in periods of high inflation & interest rates ?

Would it be cash invested in across a broad range financial instruments or in RE,
have a lot of friends who RE in such period as they consider that asset never depreciates in actual value!

I find this view puzzling, as in the end value of RE asset is what a buyer can actually pay for ?

would love to hear from the older/wiser lot on this.

regards
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  • Hello
    Mohan

    As you know High inflation eat all earnings of cash investments which being made in Financial Instruments like FD's, RD's, Bonds etc.., even you have to pay some tax also on interest earnings.

    While in RE investment (in Land) there is no depreciatioan, there is a fixed stock of land it is not going to increase, and in coming years pressure of population and civiliastion will inhance the demand of Land in near by areas of cities.
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  • Had a posted a link which had interesting data on real estate as an asset, lo behold it it does not appear, is there a forum rule w.r.t external links, could someone shine some light on this ?
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  • Thought hard about this ...

    Originally Posted by spmohan
    hello everyone,

    have a query w.r.t type of assets that one would prefer to hold in periods of high inflation & interest rates ?

    Would it be cash invested in across a broad range financial instruments or in RE,
    have a lot of friends who RE in such period as they consider that asset never depreciates in actual value!

    I find this view puzzling, as in the end value of RE asset is what a buyer can actually pay for ?

    would love to hear from the older/wiser lot on this.

    regards



    Mohan,

    This is a very interesting and hard question to answer and I have been thinking about it (as also searching for answers from gurus in this business).

    The real question here is, when inflation is high (and interest rates keep pace with it; not necessarily a given condition as Central Banks are trying their best to keep interest rates low despite inflation starting to climb uncomfortably), how do you keep the purchasing power of your money intact! If this does not happen, inflation essentially seriously cuts down the value of your money and depreciates it.

    There are 2 parts to this. One is, if your income continues to climb along with inflation (like it did before 2008) then you don't have a problem. The second part has to do with your savings. If high inflation takes hold without incomes levels going up commensurately (as current scenario in the world suggests), most people will see serious erosion in their disposable surplus. Thus, even though you see prices of assets inflate initially, it becomes harder for people to buy at those levels and thereby demand will necessarily fall eventually. This will result in high inflation and low demand (Stagflation) like in the 1970s, which essentially freezes the economy and eats away into your wealth. Basically from 1966 to 1982 there was practically no growth in the US when it faced such a scenario.

    Under these circumstances probably the best bet would be to hold 10-15% in REAL MONEY (Gold/Silver) and the rest of your assets in CASH (meaning short-term fixed income securities).

    Almost every other asset will become illiquid and maybe even decline in value eventually. Holding cash will enable you to track assets such as land and stocks and buy into them when bargains are presented to you.

    cheers
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  • Thank you for the response wiseman,

    the genesis for the question being the cash at hand, how does one use it ?

    Initially when i started out to understand the situation, my solution was to buy RE so as to offset the risk!, more i dug deeper, the lesser it made sense. It still does not at times when i see certain decisions made by acquantices.

    Amount of debt, be it be single/multi income households are ready pile on to their BS is frightening, people do not even bat a eyelid !, answer to every problem is "long live credit", and other side spectrum is black, general tendency here since it is not doing much just sitting around, might as well employ it somewhere, in both cases "value" is the casualty.

    People just refuse to back opinions with data, their answer to all being "sentiment".

    I do concur with your your views, as i find assets such as RE extremely illquid, have experienced it first hand. Only answer to all this being personal growth.

    I have read other posts on this forum especially one posted by realacres, it was a fantastic post. Allthough i'm not as bearish i do feel there is a large probability for a timebased correction.

    i do hope the links will be posted, my intention is not to drive traffic but to highlight certain pts

    hxxp://businesspandit.wordpress.com/2009/08/30/risk-analysis-of-investment-real-estate-vs-equity/
    hxxp://www.jagoinvestor.com/2009/12/returns-of-real-estate-in-india.html
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