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How do you beat inflation? This is perhaps the personal finance question of 2022. No matter where you turn, prices seem to be rising, and the sticker shock shows no signs of stopping. Though inflation can be frightening, there are ways to fight back within your personal life and your portfolio.

The best action you can take is to aim to stay employed, or to stay in business if you own a company. This is because wages and business profits generally rise over time, while most unemployment benefits or pension payouts do not. As a result, retirees and the long-term unemployed often struggle more during inflationary periods.

If you are working, you may also want to consider three related strategies to improve your prospects.

First, ask your employer for an annual cost-of-living adjustment (COLA), which tracks with inflation. An annual COLA will help you maintain your standard of living, even if you do not get a raise. Second, consider looking for new and higher paying jobs. You have little to lose by applying for jobs in a tight labour market like we are seeing now. Third, strive to add value at work and help your organization excel, or increase your skill set through formal education and training. Doing either (or both) of these activities will grow your employability and income-earning potential.

The second personal action you can take is to reduce expenses. If you can cut discretionary costs, you will be able to save more or divert funds into items you cannot avoid (food, rent/mortgage payments, car loans, critical medical expenses, taxes, etc.). The internet is full of tips and tricks to cut costs, and friends or family may have local insights too.

Then, of course, there is debt. Cutting your debt could be critical, especially if you owe a lot. The higher inflation goes, the higher interest charges on borrowed funds tend to go as well. Every time the Bank of Canada raises rates, commercial lenders raise rates too. Therefore, it makes sense to pay down your debt as fast as you can and avoid new loans. If you have many debts, it typically makes most sense to pay off your highest interest rate obligations first, and then pay off your lowest interest rate debt later.

Finally, investing wisely is very important. Though investing is tough even at the best of times, inflation’s impact on different asset classes is well known and instructive. Inflation tends to hit cash and bonds hard. By contrast, commodities and commodity-related companies tend to do wonderfully, while stocks and real estate can do well or poorly, depending on how much debt they are carrying and what sector of the market they are in.

This year the stock market has taken a beating as inflation and interest rate increases have driven valuations and expected returns lower. During the downturn, I have taken the opportunity to add new names to my portfolio and pad existing positions. Three of the companies getting a top-up include Orange SA, Banco Santander SA, and Yamana Gold Inc., all stocks that the Contra Guys have written about in the past.

In each case, I think they will do well in an inflationary environment. The telecom giant Orange SA, for example, should beat inflation because its services are not discretionary: people need their phones, data plans and internet access. Banks tend to hold their own during inflationary periods too as they can maintain or expand their net interest margins. This should help Banco Santander which has operations in Europe, Latin America and the United States, where rates are going up. Meanwhile, Yamana Gold is in the commodities space and is subject to a merger with Gold Fields Ltd. Historically, gold-linked companies have outperformed the market during high inflation, and having a merger in play provides the cherry on top.

I would add that I am comfortable owning these three positions whether inflation is currently peaking or not; they are good bets either way. This is because they have low valuations, good upside and strong growth prospects, especially in the case of Yamana.

Inflation is aggravating and anxiety-provoking, but there are ways to try to ease the impact. If you are an investor, check your portfolio’s exposure to different asset classes and adjust carefully to an asset allocation aligned with your risk tolerance. Regardless of investments, look through your personal finances for expense and debt reduction opportunities. And, most importantly of all, stay in the work force, invest in yourself and increase the value you can provide to others. The more of these actions you can take, the better the odds you will not only beat inflation, but thrive in the long term.

Philip MacKellar is a writer for the Contra the Heard Investment Letter.

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