Best Investments During Currency Devaluation: Making the best investments during currency devaluation means having a good idea of how this type of financial change works, and how it affects different types of financial holdings. It also involves a fundamental understanding of the power of diversification to manage change.
First of all, it’s important to make a distinction between international currency devaluation, where countries may deliberately devalue their currencies, and domestic currency devaluation that happens for a variety of reasons.
When companies deliberately devalue their currency, they often do it because of a trade imbalance. But what’s good for the overall economy isn’t always good for the individual investor. That leads to a scramble in terms of individuals and funds protecting themselves from the effects of the devaluation.
People are also worried, though, about domestic currency devaluation, which some talk about as synonymous with inflation. The idea is the same – the individual dollar or national currency that you hold isn’t worth as much anymore. Also, if a national government central bank (i.e. the Federal Reserve) injects massive amounts of new money into the system, it dilutes the financial power of the currency, and that can lead to a type of devaluation as well.
Whether you’re responding to either of these kinds of currency devaluation, the same strategies can help you to maximize your investments in capital during these times.
What Should I Buy Before Currency Devaluation?
In any context where currency devaluation applies, holding real estate can be a useful strategy.
The idea is relatively simple – any time that a currency loses value, the real estate is worth more in nominal terms, because it’s purchased at a fixed price with a fixed interest rate. It’s purchased with pre-devaluation currency.
In other words, you’ve made an enormous investment prior to the currency devaluation in those initial prices, and when the currency becomes devalued, your property is worth more in terms of dollars or the national currency in question.
Some experts refer to this as inflation-induced debt destruction – the idea that you’re suddenly sitting on an asset that’s worth much more than you paid for it, and more than the amount that you currently owe. It’s a happy accident for some home buyers, but investors often seek out real estate as a particular hedge against currency devaluation and other eventualities, while also reaping money from rents.
How To Protect Against Currency Devaluation
Another way to protect your portfolio against currency devaluation is to invest in commodities instead of just equities.
Your equities are priced in terms of dollars (or other national currency) and some could be vulnerable to currency devaluation. Commodities, on the other hand, are priced according to a broader value, which is important when you are looking at the best investments during currency devaluation.
Gold is, for many people, the best example. It’s a universally prized physical element, a precious metal that carries its own per ounce price, despite what any given national currency does. When a currency is suddenly devalued, you can see the price of gold rise against it.
That makes gold holdings or other precious metals an appealing part of surviving currency devaluation in a national market. Some also invest in rare earth metals – metals that did not previously have a high value, but are being revalued by scarcity in a particular set of industries.
How To Make Money When Currency Collapses?
Cryptocurrency is another option that works a bit differently.
One of the biggest attractions of cryptocurrency in today’s market is its ability to generate interest while it adjusts its value for inflation or other forms of currency devaluation.
Another way to say this is that when the Federal Reserve injects trillions in new money into the system, equities markets experience certain kinds of volatility. Then, too, it can be harder to get interest returns in these traditional markets because the central bank is keeping interest rates so historically low. That’s great for borrowers, and for incentivizing buying on credit, but for investors, it becomes harder to find a way forward that will make money grow.
That leads people to abandon these markets and invest in cryptocurrency as one of the best investments during currency devaluation. The cryptocurrencies should retain their value regardless of what a national currency does, and they could also offer much higher interest rates, where staking your cryptocurrency gets you more cryptocurrency, in the way that national currencies do when they are strong.
If the returns from a crypto coin are much higher than the returns from a market measured against the S&P 500 index, that’s a powerful incentive for investors to move into the cryptocurrency markets.
Which Assets Hedge Against Currency Devaluation?
Other assets can also help you protect your portfolio against currency devaluation. Many of these are sometimes called real-world assets – for example, artworks or valuable collectibles, or livestock or various kinds of products.
These assets hold their value despite currency devaluation, but are sometimes a little riskier than precious metals or commodities. Artworks, for example, can experience changing value due to the volatility of this particular market.
Then there’s a whole new range of hot investments called non-fungible tokens or NFTs, which can be a sort of digital ownership asset for a digital artwork.
Many have questioned the security and basis of these assets, since they can be rather vague as attached to a piece of intellectual property.
Emerging Markets Stock & Debt
Another way to deal with currency devaluation is to participate in other types of international investment. Many traders have found success investing in the economies of emerging countries.
For example, in past years, as investors became jaded with stocks in developed countries, many of them turned their eyes to a set of stocks and currencies attached to the BRIC emerging markets group: or Brazil, Russia, China, and India, all of which are large nations.
The idea is that as these economies grow rapidly, money grows with them, and that money invested in areas related to these economies will produce returns. That’s been a legitimate source of investment for experts who make it their business to learn about the disparities and differences between national economies at a given time.
Others have used currency exchanges to hedge or diversify against currency devaluation in a particular country. Simply exchanging currencies is a relatively primitive way to deal with currency devaluation, but it can produce results. This is easier in countries with more relaxed banking rules under democratic administrations that allow citizens to buy or sell foreign currency, as some countries have historically imposed bans on this kind of activity.
All of the above can help investors to understand the threat of currency devaluation and prepare for it when it is likely to happen. Adjusting a portfolio is key to managing change in the financial world. Instead of passively waiting for news about economic markets, proactive traders and investors attempt to predict what’s going to happen and change their personal investments accordingly so that they are not caught unawares when inflation or currency devaluation or something else happens.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.