89. Governments are Worried about Inflation, should we? 2023 Investment Approach?

Last week, the US Federal Reserve Board announces another rate hike to combat rising inflation currently doing at 7.1% (November 2022), this is not surprising as this is way beyond their inflation target

What Is Inflation Targeting?

Inflation targeting is a central banking policy that revolves around adjusting monetary policy to achieve a specified annual rate of inflation. This is known as the target rate, which is normally set at around 2% to 3%.

The principle of inflation targeting is based on the belief that long-term economic growth is best achieved by maintaining price stability, and price stability is achieved by controlling inflation. (https://en.wikipedia.org/wiki/Federal_funds_rate)

As the biggest economy in the world, this policy decision by the US Fed influences the rest of the world including the Philippines, expect that the BSP would be announcing hawkish monetary policies along this line

How does this affect us?

Higher interest is a double edge sword - this is generally good for savers as we could expect an uptick in the interest we are getting for our savings, but a bane for borrowers as this would translate to higher costs, this is especially disadvantageous to corporate borrowers as the extra cost in borrowing may eat into their profit margins

This is why the stock market normally reacts negatively to interest rate hikes or even just the prospects of it

2023 Investment Approach:

1. Ensure that you have sufficient liquidity (at least 3 to 6 months of expenses)

2. Funds placed in any equity linked vehicles may not provide any capital gains in the near term

3. Just like any other economic indicator, interest rate policies move in cycles, so if you have extra funds that you can set aside for a year or two, picking up some bargains may make sense. As there would be quite a lot of volatility going forward, take a "cost averaging approach", the best would be taking position on a monthly basis (whether VUL, MF or UIT)

Disclaimer: This may not be suitable for you considering your specific financial circumstances, best to consult with a financial advisor

all the best my friends!

#acgadvice