17 years of assets destroyed - How to protect yourself from inflation now

By early March, the surface was glittering again. The share indices are pointing upwards, especially in Germany. The Dax has been clearly up since the beginning of the year alone. At the same time, interest rates have finally risen. The financial market again promised slight profits.

But the week before last and the past week have shown how deceptive the calm is: the bankruptcy of the Silicon Valley Bank has shaken the markets. It went up and down like a roller coaster. Bank stocks fell in value at lightning speed. UBS had to save Credit Suisse by takeover.

There was no longer any sign of security or a stable upward trend. And that after 15 months, in which German savers have already lost gigantic sums - more than during the financial crisis if inflation is included.

At the same time, the central banks have made a 180 degree turn by ending the zero interest rate policy, which has consequences for investors. Last Thursday, the European Central Bank (ECB) increased the key interest rate by 0.5 percentage points to 3.5 percent. One thing is certain: Wealth accumulation must be realigned.

German savers and investors lost 337 billion euros in 2022, as calculated by the digital asset manager Whitebox. Assets fell by 4.4 percent. This minus is distributed fairly evenly across equities, bonds and mutual funds. Cash and savings brought stabilization with a gain of 0.04 percent.

But the last example shows the problem. Because even if the absolute amounts of cash and savings deposits remained constant, they lost significantly in value in 2022. Inflation has eaten up part of it. Stocks, bonds and fund units, savings deposits and inflation resulted in a real asset loss of 12.3 percent for the past year.

That is more than twice as much as during the financial crisis, when the real minus was 5.3 percent. In 2022, the wealth gains of no less than 17 years were destroyed in this way. And since then, only a small fraction of that has been caught up.

After all, the ECB has declared war on inflation. Interest rates have been raised continuously since the summer of last year. Therefore, there are now three to four percent returns for one, two or three years for bonds with a good credit rating. And even individual banks are once again offering call money accounts with an interest rate of just over two percent.

Michael Busshaus, founder and managing director of the online broker Justtrade, fears that many Germans will say goodbye to the stock market in the coming years. "The Germans have an affinity for interest," he says. "Many people who entered the stock market when interest rates were zero will therefore exit again," believes Bußhaus, "even if that's a mistake."

Because with an inflation rate of around seven percent, as forecast by the Bundesbank for this year, savers with interest rates of two, three or four percent are still making losses in real terms - even more than before during the zero-interest phase. Because at that time the inflation rate was only one percent.

"Especially in inflationary times, the share still belongs in every portfolio," agrees Marian Henn, partner at Allington Investors AG in Bad Homburg. "As a tangible asset, it is ideally suited to protecting assets from the negative effects of inflation."

However, something crucial has changed when investing in shares, says Carsten Roemheld, capital market strategist at the investment company Fidelity. This is due to the role of the central banks. “Over the past 20 years, with their flood of money, they have ensured that prices have risen across the board. The financial market lived off the drug of cheap money.”

Many business models that were and are unprofitable were also able to survive as a result. "In addition, the central banks always reacted to every problem immediately with new cash injections, which means that price falls were only compensated for very briefly and very quickly."

That will not happen again in the future. Inflation is forcing central banks to tighten the reins permanently. Setbacks in the stock market are no longer compensated for after two or three months. The cycles are getting longer, slumps more frequent. In theory, investors can take advantage of this by buying on the lows and selling on the highs. And indeed, many private investors have recently done so.

Immediately after Russia's attack on Ukraine, when stock prices fell, institutional investors fled the stock market, with the majority of retail investors buying. "For us, 55 percent purchases were opposed to 45 percent sales," says Bußhaus. Nevertheless, he advises against such a tactic.

"Private investors who don't trust themselves with the appropriate timing should therefore simply stay invested long-term, across all interim price slumps," he advises. "Ideally with a savings plan that allows them to invest continuously."

Of course nobody will invest everything on the exchanges, many only place a fraction of their money there. So far they haven't had to worry about the rest, most of it was lying around in accounts with no interest, and with an inflation rate of one percent, that was bearable. But in the future everything will be more complicated. Because even the money not invested now needs intensive care.

Interest hopping is back in fashion: savers should always keep an eye on the best conditions for overnight money offers and not hesitate to move the money back and forth in order to get the best return. And bonds should also become an option again, especially for companies.

"You can already make real money with bonds that have yields higher than inflation," says Henn. However, these are currently only high-yield bonds, which involve a high level of risk. "If inflation abates in the future, bonds with good credit ratings will also be attractive again."

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