Inflation
Understanding the reasons behind the rise in inflation
The rising costs of living that we are all experiencing have resulted from a number of unexpected events that have caused prices of our everyday products and services to inflate. This began with the COVID-19 pandemic, during which supply chain interruptions and shortages drove up the cost of goods. This, along with the crisis in Ukraine, has put further strain on businesses by disrupting the energy and food supply. With all of these events happening at the same time, energy costs and the prices of everyday products and services have soared, which is what we refer to as inflation.
Why keeping your investments in cash is not as safe as you think
When our assets are in cash, we are exposed to inflation, which erodes the purchasing power of our money. This means that £1 can buy us more things today than it can tomorrow, as that pound will be worth less. Inflation reached 10.1% in the last 12 months, according to the ONS, a level not seen since 1982 - this has effectively reduced the purchasing power of £1 by 10.1%.
Investing in the stock market can be one of the most effective strategies to tackle inflation. Many companies are able to pass on some, or all, of rising Input costs onto customers and end users, meaning that in many cases the full impact of inflation Is not felt in corporate balance sheets.
The longer we remain out of the market and keep our money in cash, the more we miss out on the benefit of compounding, where the earnings you get from an asset over time - from either capital gains or interest – can be reinvested to generate additional earnings over time. This is the primary reason why investing, and the help of an Adviser and/or Investment Manager can help us grow money faster than the rate of inflation in the long term.
Source: ONS - https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/september2022
Protecting your savings from inflation
At the moment, there is a risk that your savings and investments, whether they are held in cash or other assets, are not outpacing inflation (we call this ‘inflationary risk’). If you want to minimise the impact of inflation on your savings and investments, a tailored strategy can be a better option. If you have more investments that are likely to grow at a slower rate than inflation, it might be wise to shift them into assets less affected by inflation.
That’s why we would recommend that you speak with your Adviser or Investment Manager. They will be able to design a plan of action for your position and what they can do to limit the exposure to inflation as they fully understand your goals, your portfolio, and current market conditions.
Understanding inflationary risk
While inflation poses a risk to your savings when held in cash, it can also pose a risk depending on the other asset types you invest in. Inflationary risk is the risk that the future real value of an asset or investment will be lower than the current real value.
Bonds are most exposed to this risk as their pay-outs are generally based on fixed interest rates, which inflation may surpass.
How sticking with longer-term, growth investments benefits you when inflation is high
It’s important to think about managing your investments for the long-term, rather than any short-term movements, because history shows us that in the long run returns have heavily outweighed any short-term declines. This means any switch to hold more short-term, conservative investments like cash or other assets means your money may not grow at a faster rate than inflation (we call this ‘inflationary risk’).
Your Adviser/Investment Manager is focused on the long-term direction of the market and what that means for your investments, including if this is an optimal time to increase your investments and if you should diversify more across asset classes.
Source: Schroders - https://www.schroders.com/en-gb/uk/individual/insights/the-data-that-shows-a-case-for-long-term-investing/
How we can help if your investments are in drawdown and your standard of living is getting more expensive
When there is a change in the value of your investments, or a change in your life circumstances, speaking to one of our Investment Managers/Financial Planners will give you a well informed chance to respond.
They can help you consider how much you are drawing down and how much you might need in the current market conditions. Then they can help you adjust how your investments are allocated to take account of the rising costs of food and energy, so that you can maintain your standard of living.
Here’s why the recent changes in the UK’s monetary policy may affect your investments
Monetary policies are implemented by the Bank of England (BoE) In an attempt to stabilise the price of goods and services, as well as achieve goals including growth and employment.
The Bank will use this tool differently depending on their objective, meaning this can have a direct impact on the market and different asset classes.
In 2022, to try and reduce the impact of inflation and stabilise the economy, the BoE switched from a highly expansionary to a contractionary monetary policy. The action, which resulted in rapid increases in interest rates, has impacted market sentiment, causing equity and bond prices to drop.
As interest rates have risen to exceptionally high levels, our Investment Managers and Financial Planners are aware of the implications of this on equities, bonds, and other currencies. So, if you have any questions, please contact your Investment Manager or Adviser to learn more about how they are responding to this time in the markets.
Understanding the three types of monetary policy
Expansionary: In this approach, the BoE lowers the interest rate to boost the economy.
Neutral: The BoE keeps the interest rate at the current level
Contractionary: Under this type, the BoE increases the interest rate to fight inflation.
The value of investments can fall as well as rise. You might get back less than you invested. You should only consider these products if you are willing to take some risk with your capital. We will consider whether such products are suitable for you before recommending an investment.
Approver Quilter Financial Services Limited & Quilter Mortgage Planning Limited 02/02/2023
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Understanding the Current Investment Landscape - Pensions & Retirement