How inflation and deflation affect investments

As most of you are aware of inflation is the percentage increase in prices of products, where as deflation is the percentage decrease in the prices of products. And something you should know about both inflation and deflation is that they can both affect your investment portfolio, but how they affect it will depend on what is going on in the economy and whether or not it is inflation or deflation. For the most part inflation is actually really bad for your investments because it limits the amount of things you can buy with the dollar amount that you have, what this means is that in one year when you were saving money you could buy a certain amount of products with $100, but three years later because of inflation that same $100 will buy you less products.

With deflation many people think that it is a bad thing because prices are falling, but in general deflation is not always a bad thing. The reason for this is that usually falling prices means that the companies have found better ways to make there product. But another thing about deflation is that with investments deflation has a negative impact on stocks, but has a great impact on treasury bonds.

Here are some things that you should know about how inflation and deflation affect investments.

Number one:
One thing that you need to know about inflation and investments is that the impact of inflation on your portfolio will depend on what types of investments you have in your portfolio. The reason for this is that not all investments are affected by inflation or deflation for that matter.

Number two:
One thing that you really need to know about deflation is that deflation pushes down interest rates, which in turn pushes down the value of the dollar. So if you are buying stocks or are concerned about payments on dividends or interest rates then you need to know that deflation will cause you to get a lower payout because it is lowering the amount of the interest rate which determines the price you are paying. But lowering the interest rate can also be good in some cases because it can increase the demand of a certain product. For example take a look at the real estate market, when interest rates were low more people bought houses, but now that interest rates are increasing less people are buying houses.

Number three:
One thing that you need to know about inflation is that if you are only investing in stocks then you don't need to worry about inflation because the prices of stocks are not affected by inflation. The reason for this is because in the long run the company's revenue and earnings should increase at the same pace as inflation. But one thing that you do want to watch out for is that inflation can cause a company's returns to be over stated, not to mention that inflation can cause the return to be overstated because of the technique it uses to value its inventory.

Number four:
Something else that you need to know about deflation is that if deflation is occurring you are going to want to invest in treasury bonds because they are not affected by deflation. The reason for this is that treasury bonds have fixed interest payments each year, which makes them a great investment when interest rates are being pushed down by deflation and the payments are worth more during deflation than inflation. And the best thing about the treasury bonds is that they are backed by the government, which can print more money if it needs to in order to make the payments.