Dealing with currency depreciation

What Is Currency Depreciation?

The best definition of currency depreciation I have across and quite simply put by investopedia is that, it is a fall in the value of a currency in terms of its exchange rate versus other currencies.

Currency depreciation can occur due to factors such as economic fundamentals, interest rate differentials, political instability, or risk aversion among investors.

Currency depreciation, if orderly and gradual, improves a nation’s export competitiveness and may improve its trade deficit over time. But an abrupt and sizable currency depreciation may scare foreign investors who fear the currency may fall further, leading them to pull portfolio investments out of the country. These actions will put further downward pressure on the currency.

High inflation is a leading cause of currency depreciation. Inflation can also lead to higher costs for exports, which then makes a nation’s exports less competitive in the global markets.

How do you protect your assets against depreciation?

If you don’t properly adjust your investments during periods of devaluation and depreciation, your total net-worth or portfolio’s return could be badly damaged by the effects of inflation. This is a result of too much money chasing too few goods.

Prices will rise in the economy, and the value of your money will decrease. To protect yourself during volatile periods such as these, you need to avoid cash or investments based on cash, put your investments in assets that will retain their value or have the potential to grow in value.

Buying Precious Metals are also a good way to retain the value of your money.

Precious metals hold their value during devaluation and are a solid hedge against inflation. It is better to buy gold mutual funds over buying straight gold because there is a better market for trading mutual funds.

Another tip is to invest in foreign markets either directly or indirectly through trade, stocks , mutual or property. This will move your portfolio out of your local devaluing currency and into other stronger currencies.

If you can afford to, invest in stocks or funds of blue chip, international companies. Companies that have divisions all over the world will be less damaged by inflation than companies who only do business in one country.

The most important tip is to not hold money in cash or money market accounts. The value of these accounts will decrease each year by the amount of inflation in the economy.