With all eyes on inflation rates, unbiased.co.uk, the professional advice website has put together some top tips with the help of its expert panel of independent financial advisers, on how to protect your finances from inflation.
1. Karen Barrett, Chief Executive at unbiased.co.uk
“Whilst savers and investors are looking to prevent inflation eroding their money it is important to choose the right type of investment vehicle to shield your savings from rising inflation. The good news is that there is help at hand – an independent financial adviser will look at your finances as a whole and choose the best products and provider for your individual circumstances from all the products available. Just go to unbiased.co.uk and search for an independent financial adviser close to your chosen postcode.”
2. Matthew Rich (Alan Seward Financial Services)
“The simple although not always palatable answer is to invest in equities. Although they are the most volatile asset class in the short term they are the best at growing their real value over the long term. If you try and avoid short term investment risk by investing in cash you will most likely regret this decision over most 10 year periods. Even fixed interest investments are a poor inflation hedge over the long term. I urge all my clients investing for 5 to 10 years or longer to invest at least some of their money in equities. I point out to them that if inflation runs at 5% a year for 10 years £100,000 will only be worth £61,391 which is quite a drop in value. With people living longer, their time frame is often longer than they budget for and the idea that inflation is dead or will remain low seems a weak argument to me.”
3. Alistair Cunningham (Wingate Financial Planning)
“I don't believe you can inflation proof your finances without taking investment risk. Even the most generous savings products tend to be linked to retail price inflation only, and pensioners’ price inflation may be greatly in excess of the conventional 'basket of goods'.
For those with a longer term horizon, risk assets offer the potential to beat inflation - over the longer term, this doesn't mean an investment purely in equities, as corporate and government debt (bonds and gilts), and real estate also have the potential to offer real returns.
Capital risk can be reduced by diversifying across many different types of assets, and it is likely to be good advice to hold a combination of equities, bonds, cash and alternative assets as part of a balanced, long-term strategy to beat inflation.”
4. Danny Cox (Hargreaves Lansdown)
“Unfortunately staying in cash is not the answer. Interest rates will rise, probably next month, but not by much and certainly nowhere near enough to boost savings rates beyond current levels of inflation. The bond markets have priced in a small interest rate rise. However gilts and investment grade corporate bonds carry more interest rate increase risk than high yield bonds. Strategic bond funds are the answer here as they can vary their exposure. Index-Linked bond funds are also, in the short term, quite attractive, but as inflation will almost certainly fall in 2012, they are a short term solution. Equity funds, particularly equity income, are a decent prospect at the moment but it does mean investors taking risk with some of their cash.”
5. Jaskarn Pawar (Investor Profile)
“It's near impossible to inflation-proof savings at the moment, so let's hope the NS&I Index-Linked Certificates come back soon. In the meantime a well balanced investment portfolio that includes equities, bonds, gilts, property and commodities is the best way to beat inflation over the long term. Nothing has really changed in that sense.”
6. Matthew Allen, Mulberry Independent Financial Advisers Limited
"Only have short term emergency funds in deposit based investments as these will never really grow above inflation, that's not their job. Deposit based investments should provide short term protection against having to dip into longer term asset backed investments which in time should provide a real return above inflation".
7. Chris Wicks (Bridgewater Financial Services Limited)
“For lower risk investors the options for inflation proofing used to include the government backed Index-Linked Certificates but these have been withdrawn from sale. The closest options are investment in index linked gilts and bonds, which for most people are probably best accessed via collective investments. The issue with these investments is that at best they will keep pace with inflation but after charges and tax they are likely to fall short. Most cash deposits offer gross interest which is less than the current rate inflation and this is likely to be made worse by tax.
There is no easy answer. For those able to take a longer term view, the only real option is to invest in asset backed investments such as equities and property which have generally outperformed inflation. These should generally be structured as part of a balanced portfolio which reflects the level of risk and period over which investors are allocating their funds. The starting point should be to get the asset allocation model (the split between cash and bonds versus equities) right and then to populate the portfolio with low cost trackers and passive funds. Full use should be made of allowances such as ISA and pension contribution relief to shelter income and gains from tax as far as possible.”
8. Adrian Lowcock, (Bestinvest)
“Whilst I think inflation will remain above target for some time I am not overly concerned it will get out of control, instead we may see a rate of about 3%. However 3% can have a massive detrimental impact on a person’s wealth, particularly as most of us have longer to live than we may realise. Based on 3% inflation rate, £10,000 invested would halve in value in under 23 years time, and would amount to £2,539 in 45 years time. So, for me, we should be inflation proofing our portfolios all the time.
Commodities have a good track record of outperforming inflation. However, there’s little question that the ‘easy’ money has already been made. Despite the long-term trend remaining intact, commodity prices and mining stock valuations have performed extremely well in recent times and there are mixed views as to how much further they have to run. Speculation will only emphasis swings in prices and does not alter the long term trends, and recent sell offs might provide buying opportunities. Of course, an experienced manager can help mitigate these risks while our favourite pick in the sector also includes an element of downside protection. Investors should be aware that commodities are typically a more volatile and higher risk investment.
Not surprisingly, demand for government bonds which deliver a yield linked to inflation is fierce. Indeed, huge demand from UK pension schemes has kept the price of index-linked gilts prohibitively high. An alternative is to find a fund that employs Index-Linked corporate bonds.”
9. Gordon Bowden (Quainton Hills Financial Planning Ltd)
“Investors must take on investment risk to try to inflation proof their finances. Money left in bank or building society deposit accounts is almost guaranteed to be eroded by inflation when low interest rates and tax are taken into account. Investors should consider investing in equities, property or Index-Linked Gilts as these are historically the best hedges against inflation. Managed funds of these assets can provide diversification of risk.”
10. Mike Horseman (Cockburn Lucas)
“Many of our investors are very concerned about the outlook for inflation given the low interest rates on offer from cash and the real damage inflation can do to their capital values and income over a modest period of time. To combat the effects of inflation within portfolios we are taking the following steps in our advice:
Allocation towards global equities we believe will also offer a hedge as dividend yields look very attractive and we feel the risk reward trade off will offer protection in an inflationary environment.
Inflation is the investor’s enemy at the gate right now and our tanks are firmly being parked in the above areas with increased exposure to global equities and Index-Linked, to ensure rising income and capital values persist to combat potentially a damaging rise in the inflation numbers from here on in.”
Karen Barrett, Chief Executive, unbiased.co.uk: 020 7833 3131
Anna Schirmer/Lisa Grando/Emily Falla, Lansons Communications: 020 7294 3682
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