Power of Inflation
For those who don’t understand the concept of inflation, inflation is the price increase of good you need to buy. Here’s an example. Assume you’re at the store buying groceries. You buy 4 steaks, a bag of potatoes, a case of water, and some chips – it costs you $100. Now assume a year goes by and inflation grew by 2%. You go back to the store to buy 4 steaks, a bag of potatoes, a case of water, and some chips. This time it costs $102 for the same items. That increase of $2.00 is due to the 2% inflation. So your $100 is now worth less (because it buys less) since you cannot afford what you bought before. If your $100 was invested for the year, and it grew to $102, you would have preserved your wealth. In 1970, if you went and bought groceries for $15.50, today you would need $100.00 to buy those exact same groceries. So if you left $15.50 in cash sitting in your account, not growing, until today you will find that your wealth has deteriorated significantly.
What is Hedging?
Everyone is happy when they’re making money, but with so many factors at play, downside risk becomes inevitable. Implemented parallel to the right strategies, cost efficient hedging can prevent your wealth from being exposed to both market corrections and recessionary risks. With the right hedge on investments that need it, we are able to help preserve your wealth when it becomes most vulnerable. Hedging is broad in how it works but serves to be powerful asset. Whether it involves capping downside risk with low carry options or shifting more weight toward non-cyclical investments, portfolios are designed to give you the level of protection you need.
Currency Risk: If you’re Canadian and investing abroad, you are exposed to currency risk. For example, if your global investment portfolio gains 8%, but the domestic currency has appreciated 6% versus the currencies abroad (Example Euro, USD, etc.), your portfolio return would be a under 2% after the currency conversion takes place. Controversy, if the currency depreciated 6%, you’ll find yourself enjoying over a 14% annualized return. Knowing when to put-on and take-off a hedge for your domestic currency will both protect your portfolio from underperforming and magnify the returns when properly exposed.