inflation investment strategy 2022

As we approach the new year, we have to talk about an important topic that’s becoming more and more relevant.

I’m of course talking about inflation, which keeps eating away at your purchasing power year after year.

Inflation has always been something to keep in mind, but it’s now reaching levels we’ve never seen since the introduction of the Euro.

Not only that, due to the excessive money printing since March 2020, the real rate of inflation is likely a lot higher than what is officially being reported by the ECB. Just look at how much the prices of assets like real estate or stocks have gone up since then!

That’s why it’s more important than ever not to have all of your savings just sitting on your bank account in cash, as you risk losing a large chunk of your purchasing power over the next couple of years.

So after realizing that inflation is on the rise and may remain high over the coming years, what can we do to protect our savings?

Well, I’ve been thinking about this topic a lot over the past two years and it certainly influenced my investment strategy. So that’s exactly what I want to dive into today.

As usual, please don’t forget that none of this is investment advice, just my personal opinion based on my own experience as an investor.

How High is Inflation in Europe Really?

According to Eurostat, the official annual inflation rate reached a record high of 4,9% in the Euro area, with some countries like Lithuania seeing inflation numbers as high as 9,3% compared to one year ago.

inflation in europe november 2021

That’s quite a lot already, but the way official inflation numbers are calculated leave a lot to be desired.

For example, housing, electricity and gas prices only make up 17,7% of their inflation calculations:

housing inflation europe november 2021
Source

With people earning an average of 14.000€ per year after taxes in the EU or 1.166€ per month, does it seem realistic the average person only spends 17,7% or 206€ per month on housing, electricity and gas? I find that very unlikely.

Okay, my wife and I do. However, we’re definitely outliers and we got very lucky with how little we need to pay in rent for our apartment!

What I’m trying to get to – I think we can all agree housing should have two to three times the weight it has right now in inflation calculations, not just 17%.

Electricity and Gas Prices are Skyrocketing

I also find it kind of crazy what has been happening to electricity and gas prices lately. You probably noticed this increase as well in your own bills.

Here’s the price chart my Austrian electricity provider sent me last week. The price of electricity has gone up 145% year over year and gas prices increased by 150%. These almost look like parabolic Bitcoin charts!

Of course there are several reasons, like the higher carbon pricing set by the EU as well as supply and demand. Still, inflation is certainly an important factor as well, pushing the price of resources upwards.

The takeaway is that your real rate of inflation depends on what you spend most of your money on.

And since the ECB is still increasing the money supply at an alarming rate, real inflation is likely to remain higher than usual.

ecb balance sheet 2021

How Can we Protect our Savings Against Inflation?

Ok, now that we’re all depressed after the first half of this post, what can we actually do to protect our euro-denominated savings?

Clearly, bank deposits and interest accounts aren’t a viable option any more, since they’re paying close to zero. Some banks even started charging interest to depositors. That is the crazy world we live in.

It seems like the only option that remains is to invest our money into assets that either have a good chance of increasing in value over time or that pay a decent interest rate on our money.

Of course, none of these are risk-free. We have to accept that there are no risk-free returns.

If you hear anyone promising risk-free investments and “guaranteed” high returns, you’re most likely being scammed and you better run!

On the flip side, I would argue that holding cash isn’t risk-free either, as you’re guaranteed to lose out against inflation.

Let’s get to the three investments my wife and I chose. Our hope is that these won’t only beat inflation, but also grow our wealth long-term and allow us to retire early if we so choose.

Inflation Hedge Nr. 1: ETFs

The first and by far largest pillar of our long-term investment strategy are ETFs (short for exchange traded funds). Our ETFs passively track a global stock market index.

ETF Portfolio december 2021

These make up around 60% of our portfolio.

We like to keep this part as simple as possible. It’s very difficult to beat the market as a whole long-term. Countless people much smarter than me have failed to do that over a long time horizon. So we don’t even try to waste time on it.

The ETF we buy on a monthly basis is the accumulating Vanguard FTSE All-World (ISIN: IE00BK5BQT80, Ticker: VWCE). Via a single, low-cost ETF, we’re able to invest into over 3.600 companies from the entire world.

We’re not placing bets on single stocks of companies, which can always go bankrupt, costing us our entire investment. Instead, we’re counting on the world economy as a whole growing over time, as it has for the past hundred years or more.

Nobody can tell you if Apple, Microsoft or Google will still be this dominant in a decade or if they’ll be replaced by other, more profitable companies. And who knows if the US will continue leading the market or if more successful companies will be based in other countries, like China, India or one can hope, Europe.

If companies continue automating more and more work via AI and machines instead of manual labor, we want to earn our share of that increased profitability as well.

Ok, now let’s get back to the topic of inflation.

In the past, stocks have been a great long-term hedge against inflation or even periods of hyperinflation, as was the case during the Weimar republic in Germany between 1920-1924:

german stock market during hyperinflation

Within only 4 years, 500 marks in the stock market were worth close to 100 billion marks, while cash basically lost its entire value.

Just to clarify, I believe it’s very unlikely we’ll ever see hyperinflation with the Euro or USD. Yet, I still think it’s worth thinking about whether or not you have some protection against the tiny possibility.

Now, if you’re new to stocks or ETFs, you need to understand that the market is volatile. Prices don’t only go up, they also drop on a regular basis.

I’ll use the MSCI All Country World Index as an example, which is very close to the FTSE All-World Index we invest in, but has more available data:

msci acwi novemeber 2021
Source

Since December 31st, 1987, this index averaged an impressive 8,47% return per year. But this average came with a lot of ups and downs. For example, in 2008, during the last financial crisis, the index was down 41,85%.

Maybe now you understand why I’m telling you to treat ETFs as a long term investment. I’m expecting around 7% returns per year on average long-term, with plenty of swings in both directions.

Market Timing Rarely Works – A Cautionary Tale

Also, as a rule of thumb, time in the market beats timing the market. Nobody can successfully predict a market decline, so I don’t try to either. I just keep investing on a regular basis and if there is a correction, I treat it as a discount opportunity to buy more at a cheaper price.

A friend of mine from Germany felt really smart when he sold all of his stocks in the beginning of February 2020, when the virus was emerging in China. He correctly assumed it was going to impact the world economy.

vanguard ftse all world returns december 2021
Source

Here’s the problem: He kept waiting for the market to drop further and is still waiting in cash on the sidelines uninvested. As a result of his decision, he missed out on a 36% return he would have had if he had simply done nothing!

To make things worse, because he sold, he also had to fully tax his capital gains already, instead of in retirement. That means he now has less money left over to get back into his ETF, at a much higher share price.

Taxes are another reason why simple buy and hold investing via ETFs makes the most sense long-term in my opinion.

Inflation Hedge Nr. 2: P2P Lending

The second pillar of my investment strategy is peer to peer lending. Which is probably not surprising, since I named this site P2P Investing Europe.

My wife and I have about 15% of our portfolio invested on different peer to peer lending platforms. These currently earn an average of around 10% interest per year, which should be enough to beat inflation.

P2P PlatformIRRInvestedValue
Mintos11,47%4.409€6.897€
Crowdestor*8,49%5.179€6.336€
Lendermarket14,44%2.513€3.313€
Viainvest12,16%2.737€3.318€
Iuvo Group11,80%1.562€2.696€
Robocash12,00%3.250€3.507€
Bondora Go&Grow6,68%1.400€1.796€
EvoEstate6,71%324€400€
EstateGuru6,78%369€407€
Mintos I&A9,90%0€59€
Total21.743€28.729€
*I can’t recommend Crowdestor at the moment, most of my loans are late

If I was starting from scratch today, I would start with these:

P2P Lending is a very unique asset class, especially for anyone that prefers receiving monthly cash flow from their investments. That’s something that could be useful if you’re already retired for example.

Another advantage is that it only has very little correlation to other asset classes like stocks. A stock market crash or correction doesn’t really impact the performance of peer to peer loans.

In a situation like that, you could even use some of the monthly cash flow from P2P lending to buy stocks or ETFs at a discount, which is exactly what my good (& wealthy) friend Bernhard Hummel did last year during the crash in 2020 (link).

Still, last year was a great lesson for me and many other investors in the space, to stick to transparent platforms and lending companies with a profitable business model, which they can prove via audited financial statements.

The loan durations I invest in vary from platform to platform and can range from a few days to a few years.

If you need your money to be easily accessible and you’re ok with earning a slightly lower yield, in my opinion the best option for that is Bondora Go & Grow.

Go & Grow automatically spreads your investment over a basket of several thousand individual loans from Estonia, Finland and Spain and pays 6,75% interest per year.

Go & Grow portfolio distribution by country – October 2021
Go & Grow portfolio distribution by country (Oct. 2021) – Source

The best part is, the interest is added to your Go & Grow account on a daily basis and you can withdraw your money at any time under normal market conditions.

The only thing you need to keep in mind is that there is a 1€ withdrawal fee.

Inflation Hedge Nr. 3: Crypto

This brings me to the third and last pillar of our investment strategy, crypto. About 10% of our net worth is invested in the two largest and best known crypto assets, Bitcoin and Ethereum.

Maybe it’s because I’m 31 years old and I grew up with the internet, but I see Bitcoin as an alternative to owning gold and as an uncorrelated hedge against inflation.

I also consider it a small insurance policy against extreme, unforeseen political or economic events.

Of course, Bitcoin has a much shorter history than gold as a store of wealth, but it also has a lot more upside potential and it’s mathematically limited in supply. And yes, the potential upside also comes with more risk, but it’s a bet I’m personally willing to take with part of my portfolio.

I also never found owning gold to be practical. You either have to buy it physically and find a way to store it safely so it won’t be stolen or you have to trust a third party when buying shares of a gold exchange traded commodity.

To me, Bitcoin is a lot easier to handle and it’s easily divisible, which gold isn’t.

This environment should have been perfect for gold as an inflation hedge. Yet, when looking at the charts, it’s still below its 2011 price and its performance has been very disappointing lately:

gold usd chart
1Y Gold price chart (USD) – Source

Even though Bitcoin is also sitting below its all time high, the asset has done a lot better over the past two years. And let’s not even talk about the second largest crypto asset Ethereum, which has been outperforming almost everything else in 2021.

It does seem as though some investors who would have previously bought gold as a hedge, are now choosing Bitcoin, as well as other promising crypto assets as an inflation hedge for part of their wealth. That would also explain gold’s lackluster performance and why the trend could continue in the future.

Then again, I could just as well be wrong! Please keep in mind that his is just my opinion.

The 10% of our assets I invested has now grown to a lot more, even though I already took out my initial investment a while back.

Due to how volatile this space is, I’m currently debating how much and how often to rebalance my portfolio. I also don’t track this part as closely as our investments into ETFs and P2P lending.

If you’re starting from scratch today, how much you allocate to this sector is completely up to your personal preference and risk tolerance, but I wouldn’t go beyond 10% of your portfolio. I actually think 1-5% is probably plenty for most people.

Personally, I would then split most of that between Bitcoin and Ethereum, the two largest cryptocurrencies.

ethereum and bitcoin

It’s up to you if you also want to mix in a small percentage of other blockchains you may find promising, like Solana, Avax or Luna for example. I have no interest in hyped up meme-coins like Dogecoin, Shiba and the likes, with no real use case.

If you get into the space, pay attention to use a reputable exchange, like Bitpanda, Binance, FTX or Kraken.

Just make sure you’re securing your accounts with strong, unique passwords and activate two factor authentication right away.

And once you own a couple thousand euros or more worth of cryptocurrencies, it’s probably a good idea to buy a hardware wallet for an extra layer of security, as it allows you to store your crypto offline.

If want to learn more about everything related to crypto, I highly recommend checking out Coin Bureau on YouTube. He certainly does a much better job at explaining any of this than I do.

Conclusion

Now you know the three asset classes we use to try and beat inflation and grow our nest egg long-term.

In case you paid attention at the percentages I mentioned, you’re probably wondering about the remaining 15% of our portfolio.

Well, a good chunk of that money is stuck in our apartment until we one day move out and the rest is in Euros on our bank accounts as well as a bit in USD for some extra diversification.

Since I’m self employed, I sadly need to leave a larger cash buffer than I would like to pre-pay taxes and social insurance in Austria on a quarterly basis. I’m hoping to find ways to decrease this unproductive cash position over time.

What are you doing to protect against inflation? Is this something you’re even thinking about?

My 2022 Investment Strategy (Video)

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Valuable Resources

  • My Investment Tools
    A list containing all my investments in P2P Lending, the brokerage accounts I use to buy ETFs, my speculative investments in Bitcoin and my free bank accounts. It even includes the tools I use for blogging and YouTube.
  • P2P Bonus Offers
    A collection of all the best, currently available bonus and cashback offers in the P2P lending space. Regularly updated.


Disclaimer: Investing involves risks of losses. You should always do your own research before investing into anything. Also, some of the links are affiliate links, which help support me, the website & YouTube channel. I only link to services I use myself, none of them are sponsored.

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