Can I Protect My Investments Against Inflation?
“I have a wide-ranging investment portfolio, including some cash ISAs that I use as an emergency fund. I am worried that my investments won’t keep pace with inflation. Can I do anything to protect my position?”
Prices tend to rise over the years, but there are sometimes spikes. For example, in the past 12 months, they have surged by 7%, meaning that UK inflation hit its highest level in 30 years. As a result, you have probably noticed that the cost of living has significantly increased. So, what does this mean for you and your investments?
Most longer-term investing seeks to maintain and grow the investor’s capital over time, but some asset classes (usually equities) are better than others (usually cash or fixed interest) at combating the eroding effects of inflation. This said, it should be noted that equities are likely to experience more frequent, and possibly large, upward and downward movements in price than cash.
In short, for those who can leave their money invested for the longer term, there is a better prospect of inflation-beating growth, even if prices do rise, albeit this comes with an element of risk. Some investment assets may even be index-linked, meaning that interest paid rises in line with inflation.
You mentioned that you have a wide-ranging portfolio – this is great as not all investments react the same under any given market condition, so investing in various asset classes can help reduce concentrated risk.
Successful investing means different things to different people; however, in all cases, the portfolio must be suitable for you. This fundamentally means ensuring it is designed and regularly reviewed with due consideration to your circumstances and objectives, while not exposing you to an intolerable level of risk.
I suggest you discuss your finances with an independent financial adviser from a firm of Chartered Financial Planners to build a financial plan and explore what measures would give you some protection against inflation. We use lifetime cashflow planning tools that allow us to calculate growth projections for your investments under different scenarios, reflecting different rates of inflation and market growth over periods of time. It would also help to determine what emergency funds you should be holding, potentially freeing up further capital for your investment portfolio.
Any opinions expressed in this article do not constitute advice. 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.