Left to their own devices, your wealth and investments are not safe from inflation, so now is the time to make inflation proof investments.
But how exactly can you craft a portfolio that can protect against inflation? What should you be looking for?
What is causing inflation?
The inflation rate refers to the average increase in the price of goods and services compared to the previous year. Consumer prices, meanwhile, are governed by the law of supply and demand.
This current bout of inflation is rooted in the post-Covid hangover in the domestic and global supply chain when supply couldn’t meet demand.
Huw Pill, chief economist of the Bank of England, thinks the central bank’s quantitative easing programme — a “money printing” scheme that paid for the £450 billion in Covid support, including furlough — may have contributed to a level of demand that contributed further to inflation rises.
However, we’ve gone from predictions that inflation would peak at 5% to an inflation rate of 10% — far beyond the Bank of England’s target of 2% — largely because of the war in Ukraine and resultant high energy prices.
How to make inflation proof investments
Unless the yield of your savings account and/or investments match or exceed the current inflation rate, your money is — while not as much as money lying dormant in a bank account — eroding.
However, you should be careful of putting your wealth into high-volatility assets; make the wrong prediction and your losses could be especially painful.
When it comes to investments, it’s best to consider it as protecting them from price increases where you can.
Here’s what you can do to make your investments as inflation-proof as possible.
In 2023, one of the best investment choices you can make is to put your money into the stocks of price-makers. These are companies that can pass on price increases to their consumers, meaning they can maintain their profitability during times of inflation. Examples of price-makers include companies in the energy, healthcare and consumer goods sectors.
When considering price-makers, it’s important to look for companies with strong pricing power. In other words, seek out companies that can raise prices without losing customers, either because they offer unique and/or essential products or services or enjoy a loyal customer base.
Additionally, it’s important to consider a company’s financial stability and growth potential, as these factors can also influence its ability to pass on price increases to consumers.
One of the most effective ways to protect your investments against inflation is to focus on capital preservation by investing in low-volatility assets.
We suggest this because low-volatility assets tend to be less sensitive to changes in the market, meaning they are more likely to maintain their value even during times of economic uncertainty.
Examples of low-volatility assets include fixed-income securities, such as bonds and certificates of deposit with the Government. These are some of the safest investments you can make, as the Government will always be able to return your investment, and they tend to perform even during bad times.
You could also benefit from defensive stocks like consumer staples, healthcare and utilities. Raw materials, especially precious metals like gold, also tend to be good investment strategies during times of high inflation.
Owning an investment property isn’t for everyone: even if you hire a property manager, owning real estate is a more hands-on type of investment than buying a real estate investment trust or other stocks.
However, rental properties can be an excellent way to build wealth over time and protect against inflation — new research from Alliance Fund indicates that even after adjusting for inflation, the average new-build property has increased by 22.1% in the last year and 62.4% in the last decade.
Investors need to be aware of the turbulent UK market, though, especially given the price fluctuations we’ve seen in recent months as demand from buyers wanes due to the cost of living crisis — the consensus is that property prices will fall by around 6% in 2023.
However, property is a long-term investment, and by renovating your purchases, you can become a price-maker yourself. Meanwhile, average rents are forecast to rise in 2023, so you could benefit from your investment by also acting as a landlord before selling up when house prices stabilise.
You should always talk to an investment adviser before you do anything with your money. Talk to us about how to make inflation proof investments.