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Rising inflation and your investment strategy

Periods of high inflation can be concerning for investors. You want to ensure that your investments at least hold their value, but you might also have market volatility and a strained household budget to contend with.

Modest inflation is good for the economy, but when prices become overheated, this can cause increased pressure on businesses and potentially a recession.

With inflation now reaching a 40-year high, we have seen significant volatility in the market over the last few months. In this article, we explore the main impacts of inflation on your investments and how you can deal with this.

 

How does inflation affect your investments?

Your investment portfolio will be constructed from a number of different asset classes. They all behave differently during the various phases of the economic cycle. High inflation can also lead to higher interest rates, which has an additional impact.

Equities form the majority of most investment portfolios. Over the longer term, equities typically provide a higher return than other asset classes and offer the best protection against inflation. However, in the shorter term, equities can be volatile, particularly when the economy is uncertain.

The type of company you invest in is also relevant. Established companies that produce steady dividends tend to perform well during periods of high inflation as investors are seeking out an income. High growth companies, such as those in the technology sector, become less in demand and can fall in value. Smaller companies can be vulnerable to the effects of inflation as they may be more impacted by rising costs.

Bonds are considered to be the more stable component of a portfolio. They produce a regular income, which can be attractive to investors during periods of high inflation. Interest rates on newly issued bonds will increase to attract buyers. However, bond prices are sensitive to inflation, and they can become volatile during periods of uncertainty. There is also a risk that the bond issuer could default.

Your portfolio may also contain property investments. Property prices tend to rise with inflation, however, can become volatile if the economy dips into recession. Property funds can suspend withdrawals if too many investors try to sell at once.
If you hold cash, you might find that the interest rate on your savings improves. However, over the longer term, cash is unlikely to hold its value in line with inflation. This is true even when inflation and interest rates are at normal levels.

 

How to invest throughout periods of high inflation

We can say with certainty that inflation has an impact on your investments. However, there are a number of unknowns. We can’t predict how the market will react to any given event, or how the timeline of these economic fluctuations will play out. Individual companies, regions, or business sectors may not follow the same general pattern. Additionally, inflation is not the only factor that can influence your investments.

The key is to invest in a wide range of assets. By diversifying your portfolio, you can benefit from the long-term growth in the market, but without concentrating too much risk in one area. As some asset classes will rise and some will fall at any given time, holding a broad selection can help to smooth out some of the volatility.

It’s also important to remember that investing is for the long-term. We expect to see fluctuations and even losses in the short term. This is a feature of investing and doesn’t mean that the strategy is not working. Typically, after a market dip, prices eventually recover their value and increase to an even higher level. Avoiding the downside can also mean missing out on the upside.

If you are nervous about the volatility, the worst thing you can do is withdraw your money. This not only ‘locks in’ any losses but limits the chance of recovery.

So, if you diversify, invest for the long-term, and avoid trying to time the market, your investment strategy stands a strong chance of withstanding periods of higher inflation.

 

Tips to combat inflation

As well as incorporating a sensible investment strategy, there are a number of other things you can do to deal with the effects of inflation:

  • Manage your household budget and discretionary spending.
  • Keep a cash reserve of at least 6 months’ essential expenditure. This can provide a cushion to deal with any unforeseen events such as repairs, illness, or periods out of work.
  • Try to maintain regular contributions to your pension and ISA. This will not only boost your eventual investment value but investing during market volatility means you can buy into the market at lower prices.
  • Check your State Pension forecast. You need 35 years’ worth of National Insurance contributions or credits to receive a full State Pension. As the State Pension currently benefits from the triple lock, this offers excellent protection against inflation.

 

Invitation

If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.

Reach us via:
t: 01228 210 137
e: [email protected]

This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.

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April 19th, 2022