The price of panic: Why investors should be wary of the inflation crystal ball

Start a conversation these days and the likelihood is that at some point it will turn to inflation. Shall we go for a drink? How’s that house move shaping up? Where shall we go on holiday next year? Avoiding reference to rising prices or the efforts to control them is very difficult. It’s a conversation worth having.

While official inflation figures have steadily descended from a peak of around 11%, rising prices are still with us. The Bank of England has made good inroads into bringing the official rate down, but this all important figure for cost of living remains uncomfortably high.

But what should investors make of this? W1M advisers are well placed to ensure that your portfolio is well-guarded against a variety of economic headwinds, including inflation. Risk appetites vary and different asset classes all have their own pluses and minuses, but some foundational investment principles will always be important.

Patience is better than panic. Devising a long-term strategy and sticking to it is more likely to benefit you than making rash decisions during hard times. For example, equity indexes such as the FTSE 100 and S&P 500 have shown consistent gains over many years despite multiple shocks. Spreading your risk is also always wise, perhaps with a good mix of cash, equities, bonds, property and commodities to ensure you don’t have all your eggs in one basket.

The vulnerability of cash to inflation is well-known. If inflation rates are high, this can erode the value of cash sitting in an account. There is nothing wrong with enjoying the flexibility of cash, but making sure it pays a good level of interest can weather any loss in value. There are also advantages to saving in multiple currencies in order to make your money work harder for you. If you can find a better interest rate on dollars then maybe they are a better option than sterling.

Bonds have always been a favourite of investors. They are known as a ‘fixed income’ asset because they provide a fixed return. This predictability gives investors a level of security that they don’t get elsewhere. The quality of bonds varies widely but provided they mature without issue the holder always knows what return they will receive. But the fixed level of return means that they are also vulnerable to inflationary pressures. Yields on bonds rise when the price drops and rising yields on some of the world’s most popular government bonds have indicated that there is a certain level of discomfort amongst bondholders with current economic conditions. A good investment adviser can talk you through how suitable bonds are for your goals.

Stocks and shares typically give the investor two ways to make profit. They can rise in value or issue dividends to holders. They don’t provide the fixed return that you get with bonds, but taking a share of profit means your fortunes rise and fall with that of the company or index. These assets can be a very effective guard against inflation as some companies will naturally do better in a high inflationary environment. Energy companies may be able to sell their product at higher prices or a budget supermarket chain may attract more customers during a downturn. Ensuring part of your equity portfolio is positioned to benefit from inflation is a good way of defending against rising prices.

High inflation is a less than ideal situation for investors, but a well-managed investment portfolio can provide stability no matter what the future holds. At W1M, we strive to provide peace of mind to our clients in all economic conditions and ensure your wealth is protected.