Inflation doesn’t just push up the price of groceries and petrol. Over time, it erodes the real purchasing power of your savings and income – even when your investments appear to be holding steady on paper.
The good news is that long-term investors have navigated inflationary environments before, and there are some clear, sensible strategies that may assist in keeping your money up with inflation.
Reactive panic can lead to unwanted consequences
When inflation dominates the headlines, it can be tempting to leap into action – moving to cash, selling down shares, or waiting things out on the sidelines. It’s a natural human response. What history shows us, though, is that it can also be one of the costliest mistakes an investor can make over the long term.
Markets go through cycles. The ASX dropped 54% during the Global Financial Crisis bottoming out in March 2009. Investors who stayed the course saw it recover within five years.
The COVID-19 crash of 2020 saw sharp falls followed by a recovery to pre-crash highs within just six months. Missing even a handful of the best-performing days in the market on the way ‘back up’ can significantly reduce long-term returns – which means sitting on the sidelines carries its own type of risk.
Staying invested, keeping a long-term perspective and resisting the urge to react to every headline is not being passive – it’s strategic.
Diversify beyond the share market
A portfolio concentrated in listed equities has served many investors well over the decades. But in a time of inflation, concentration can be a vulnerability.
“Diversification is critical in any income strategy,” says Dean Weinbren, managing executive at high-yield fixed-term accounts provider TermPlus.
“Having exposure across investments that behave differently can help build resilience and reduces reliance on any single investment – which can ultimately deliver a smoother ride.”
That could mean looking beyond the ASX and beyond shares altogether. Asset classes that don’t move in lockstep with the share market – like global private credit – can help stabilise your portfolio and provide a reliable income stream when share markets are volatile.
TermPlus is an online term account platform that aims to deliver attractive and reliable monthly income to account holders, underpinned by a highly diversified portfolio of global private credit. If global private credit is new to you, our previous article breaks down what it is and why more Australians are paying attention.
Watch video: Is the share market the only way to generate passive income? (Post continues after video)
Understand the difference between fixed and floating rates
This is where inflation can actually do some damage, and where the structure of your income investments really matters.
When inflation rises, the RBA will usually respond by lifting the cash rate. If you hold a fixed-rate product, you don’t benefit from those upward movements. Your income stays flat while the cost of living keeps climbing.
“With a fixed rate, the value of your returns erodes even if your fixed return looks fine on paper,” Weinbren explains.
“A floating rate that moves with the RBA means your return targets adjust as the interest rate environment changes. Rather than being locked into yesterday’s rate, you’re staying aligned with today’s conditions – which is exactly what you want when inflation is pushing rates higher.”
TermPlus specifically structures its target rates as a fixed margin above the RBA Cash Rate. So when the RBA moves, the targeted monthly income adjusts immediately – no guessing, no lag.
“Cash rate adjustment is built into our accounts,” says Weinbren. “Customers have comfort in the reliability that these adjust straight away – with the aim of keeping their monthly income aligned with rising costs rather than falling behind them.”
For investors seeking reliable monthly income, that kind of structural feature can make a big difference.
Check in on your super
Inflation can also be a useful reminder to review your superannuation strategy. Super is a long-game asset, and even small adjustments – like increasing voluntary contributions during higher-income periods – can make a significant difference over time. If you haven’t reviewed your fund’s investment mix recently, it’s worth checking whether it still aligns with your goals and time horizon.
This isn’t about reacting to short-term market movements. It’s about making sure your long-term settings are still doing the work you want them to do.
The bottom line
Inflation can be unsettling, but it isn’t new and it’s no reason to panic. Investors who come out ahead are often those who stay calm, diversify thoughtfully, and make sure the structure of their income investments is working with the economic environment, rather than against it.
The difference between a fixed rate that slowly loses ground and a floating rate that moves with the market might not feel significant in a stable environment. When inflation is elevated, that difference can be substantial.
If you’re still unsure about how to manage your investments through inflationary environments, you may also be well placed speaking with a financial planner to get tailored advice.
Find out more at termplus.com.au.
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This article is brought to you by Your Money & Your Life in partnership with TermPlus.
