— Protect your savings for the future
Investments, always subject to a variety of risks that can impact their value, are never safe. For example, the value of your investment could decline due to the performance of the company you invest in.
If you hold fixed-rate bonds, a spike in interest rates could cause the value of your investment to fall, as demand switches to higher rate bonds. But another investment risk has once again reared its head: high inflation. Usually measured as the average increase in consumer prices over a year, inflation erodes spending power if income or returns do not keep pace.
A small amount of inflation is actually a sign of a healthy economy and acts as a barrier against the damages negative inflation can bring. While making inflation-proof investments is essential in the short-term, inflation is something that investors always need to bear in mind for the future. Here are some of the methods you can use to inflation-proof your investments.
Disclaimer: the following are investment methods that may or may not suit your situation, but should not be taken as investment advice. Always talk to a financial adviser before investing.
Is now a good time to invest in equities?
Equities, also known as stocks, represent ownership in companies, and buying them has historically been seen as a good way to beat inflation. That’s because some companies have enough market power to control the market prices of their products and services without losing their customers — in that sense, they’re ‘price makers’. Such a power in the market makes these firms profitable even during times of economic hardship.
As a result, the value of their stocks tend to increase over time to match or even overtake inflation in some cases. Examples of price-makers in today’s economy include businesses in the energy and healthcare sectors — industries that offer essential goods that people will always need.
Alternatively, you could find a price-maker who can afford to increase prices without losing customers because they enjoy a loyal customer base or offer unique products. However, investing in equities still carries significant risk, including the risk of losing your principal investment. Additionally, the value of equities can be volatile, meaning they can fluctuate significantly in the short term. As such, it’s important to have a long-term investment horizon.
In now a good time to invest in real assets?
Real assets are defined as physical commodities with a high intrinsic value because they can provide a tangible benefit or use to their owners. Examples include precious metals, energy, infrastructure projects and agricultural goods. Healthcare, including providers, drug developers and medical device developers could also be defined as real assets.
Investing in real assets can be a good idea during periods of inflation. When the price of goods and services increase, this leads to a decrease in the purchasing power of government-issued currency, like the pound or dollar.
However, real assets, especially those with real benefits to society, may be able to hold their value better than regular currency during inflationary periods. Gold has historically been seen as one of the better hedges against inflation.
Is now a good time to invest in property?
One of the most common real asset investments is property. Property prices have increased impressively over the last few decades — while offering the owners an additional revenue stream in the form of rental income.
One thing to bear in mind is that property can be a little more hands-on than other types of investments (unless you’re willing to hire someone to manage your property for you).
Meanwhile, forecasts suggest the average house price could drop between 6% and 12% in the near future — but if the Bank of England slashes interest rates, which has a knock-on effect on the rates mortgage providers use to charge for their products, things could turn around.
In our recent blog post, we dive deeper into the question Is now a good time to buy-to-let?
Diversifying your portfolio is one of the best ways to inflation- proof your investments — after all, why invest in just one of the assets we’ve discovered when you could invest in a number of them?
Meanwhile, investing in a variety of assets can reduce the impact of one class performing poorly against inflation or even an asset resulting in negative returns.
There are several strategies you can use to inflation-proof your investments in the UK. However, before committing your money to a risky endeavour, you should always talk with a professional. No investment is without risk.
Seeking professional investment advice can help you determine whether it’s a good time for you to invest. As your accountant, we can guide you through the relevant tax considerations, registrations and possible ownership structures. We’ll work closely with you to minimise your tax exposure to ensure you maximise your returns.
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