Inflation is again an issue when it comes to investing. It’s actually always the issue of investing. After all, you don’t spend the money in order to increase it and be able to buy more later. However, you can only buy more if the return on the investment is higher than the devaluation of the money.
So when it comes to outdoing inflation by investing money, it is always important to think about how long money should be invested. Of course, the longer you have to go without the money, the more difficult it is to answer the question of how high the devaluation of money will be during this period and what return is needed so that the money does not become less valuable.
Quantifying inflation to the last decimal place is neither possible nor necessary. In an environment of reasonably stable and rather low inflation rates like in Germany, the question is: Will inflation stay as high as it is, will it fall, or will it rise? This question is difficult enough, but the longer the time period in question, the more difficult it is to answer. For those who only go without money for a short period of time, say three or six months, the question of inflation hardly arises.
Falling fixed deposit interest rates
Anyone who deposits their money into a current account currently receives an average annual interest rate of around 2.1 percent. For three-month fixed-term deposits it is 2.2 percent. Anyone who parked 1,000 euros in a current account three months ago received an average of around 4.85 euros in interest. The purchasing power of these 1004.85 euros today would be around 1005.87 euros compared to mid-August. The reason is the decline in monthly inflation rates, which were even negative in November.
At the beginning of this year things looked completely different: Anyone who had done the same would have only received 1.25 euros in interest and would have had to live with a loss of purchasing power to 975.66 euros. Put another way, if you didn’t want to suffer a loss of purchasing power for three months at the beginning of the year, you would have needed an interest rate of more than 10 percent. Most recently, money market interest rates more than compensated for inflation. In this respect, saving was worthwhile from this point of view. But it is also clear that this will not remain the case. The online service Verivox, for example, is already recording falling fixed deposit interest rates. But since inflation is also falling, in the end it depends on what happens faster.
Short-term stock investment risky
If you want to preserve the value of your money as much as possible in the short term, you can’t avoid bank deposits – even if the relationship between interest rates and inflation is unfavorable. Investing in a stock ETF in the short term is a risky undertaking. With a probability of 95 percent, the DAX price change over three months is between minus 7.5 and plus 12.4 percent. Apart from the fact that the DAX has already lost almost 40 percent within three months, you are taking a high risk with a short-term stock investment – not to mention possible fees that reduce the return.
In the context of relatively stable and low inflation rates, precise inflation forecasts play a minor role, even if one invests for the very long term. Because in the very long term, both returns and inflation rates stabilize. 95 percent of the average inflation rate in Germany over periods of ten to twenty years between 1960 and 2022 was around 1.4 to almost 4 percent.
2023-12-15 18:47:51
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