Howard Goodship, IFA Ringwood -What investments protect you from inflation? 

Tuesday 16 August, 2022

 

What does high inflation mean for your investments?

High inflation is leading to a big increase in the cost of living. For anyone with savings the difficulty is knowing how to invest your money to protect it from inflation going forward. 

Inflation hits new highs 

Prices have risen rapidly in the UK during 2021/22. According to the Bank of England in June 2022 prices rose 9.4% compared to June 2021. This is significantly above the Bank’s 2% target, and the rate of inflation is forecast to keep rising in 2022. 

Cash accounts are paying more but interest rates remain at relatively low levels 

Although interest rates are still at relatively low levels in historic terms, cash accounts and NS&I savings are now paying between 1%-2% per annum following the recent increase in base rate. Fixed rate bonds are also offering slightly higher rates given the expectation that interest rates could rise further due to inflationary concerns. 

Why is the UK’s inflation rate high? 

At the same time inflation is rising, being fuelled by pent up demand, low inventories, rising commodity and oil and gas prices and restricted supply. Inflation is the most topical concern right now with many concerned inflation levels could remain high for the near future because of the continued Russia/Ukraine war. 

Inflation is “The Silent Assassin” 

Taking away all the views and noise, the fact remains that for retirees on a fixed income, inflation is and always has been the greatest threat to a comfortable retirement. I call it “The Silent Assassin” because even at a modest 3% per annum, prices double every 24 years. 

What can you do to counter these challenges? 

Cash/NS&I

These provide security and liquidity, albeit at low returns. Sufficient cash should be retained for any expenditure within the next 3-5 years, plus a buffer for emergencies. By keeping sufficient cash, it allows money that is invested for a sufficient time to do the job you want it to do without needing to access it. 

Investment Asset Classes

Fixed interest bonds are low risk and earn interest that should exceed cash savings rates. However, they don’t increase with inflation and the capital value can go down if interest rates rise, or on reduced demand. 

Inflation linked bonds offer interest and capital appreciation in line with inflation, although the purchase prices can go up and down depending on demand, usually linked to the outlook for inflation. 

Property 

Property can generate an income, and the capital value can appreciate in value over time, so property can be a good hedge against inflation. However, it is less liquid and can go through periods of decline. 

Shares or funds 

Shares or funds that invest in shares allow you to own small pieces of companies. Well run companies should increase their profits each year and you receive a share of those profits by payment of a dividend, or by the company reinvesting those profits and growing them further. Over time, share prices are linked to the company profits so if profits are rising, so should the dividends and value of the shares. In the short-term, the share price can fluctuate up and down significantly with demand and investor sentiment. These can provide some inflation protection. 

Multi-Asset Portfolios

We focus on managing investment volatility to ensure we achieve a relatively consistent return for your investments - trying to capture rising markets and to avoid the worst of falling markets. This is normally achieved by spreading your portfolio across a wide range of assets and carefully researched investments and managing this blend through ongoing reviews. Not all asset classes or investment strategies move in the same direction at the same time. We ensure your portfolio is spread across a wide range of investments that tend to behave differently to one another, smoothing out the peaks and troughs of investing for you. 

Howard Goodship, chartered financial planner, Ringwood, Hampshire said:

‘We are all experiencing very difficult times due to the cost-of-living crisis and the uncertainty of the inflationary pressures to come. There is no easy answer as to which investments fare best in high inflationary environments, but as independent financial advisers we always recommend spreading your risk and investing in a diversified investment portfolio. It’s particularly important in times like this to make sure you keep enough cash available to pay your increasing outgoings before investing your savings. We offer financial advice to all age groups, but it is particularly important that anyone coming up to retirement takes retirement advice to check they have enough savings and pensions to retire on, given the inflationary impact. The key to a successful retirement in financial terms can be to own a balance of cash and risk-controlled investments. The optimal balance will depend on your personal lifestyle and costs, sensitivity to fluctuations in the value of your capital and your timescale. If you would like to learn more or discuss your personal situation and how to counter inflationary pressures, please contact our financial advisers for a no obligation initial chat.’ 

The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. The contents of this article are for information purposes only and do not constitute individual advice.

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