In the UK, inflation has been growing steadily over the past year. Figures from the Office of National Statistics show that CPI inflation crept up from 4.2% in October 2021 to 11.1% in October 2022.
With economists predicting that this growth will continue for some time yet, Moneyfarm considers some of the best inflation-busting investment ideas to protect portfolios.
- Minimise use of savings accounts
We all need access to some emergency cash at some point. But stashing too much cash in savings accounts could be doing more harm than good.
In fact, statistics show that Britons, too often, allow their cash to languish in savings accounts despite them paying next to no interest. Figures released in September by the trade group representing UK banks confirmed there was close to £900bn in instant access savings accounts despite Bank of England warnings that inflation will remain high for months to come.
Cash held in these accounts may be returning as little as 0.01%.
When inflation is higher than the interest rate, it erodes the value of the savings you have on deposit. When you come to spend that cash, goods cost more, so your money is worth less than at the outset. The good news is that savvy investors can fight back…
- Make better use of investment portfolios
By moving some assets from savings accounts into investments, Britons could stand a better chance of beating inflation. Obviously, the degree to which investors can successfully mitigate inflation depends on risk appetite, asset allocation, and the extent to which inflation will continue to rise in the months and years ahead.
The Moneyfarm UK portfolio pages illustrate several examples of how a portfolio would have performed in recent years. For those with a higher risk appetite, the Moneyfarm Portfolio 7, for instance, would have returned 13.1% between January 2020 and the start of October 2022, while the Portfolio 6 option would have returned 10.9% over the same time. The company’s Portfolio 5 – better suited to those with a medium risk appetite – would have returned 6.8%.
Not only do these illustrations highlight the potential to mitigate the impact of inflation but they afford individuals an opportunity to diversify portfolios and lower concentration risk.
More details on the assets contained within these portfolios are available on the Moneyfarm website.
- Harness the power of compound interest
For those investors able to deploy their cash for longer periods, inflation’s impact can be lessened still further by exploiting the benefits of compound returns.
“Compounding” accelerates the returns on your investment, because you earn returns on both your initial investment and on the gains you have already made to date. Over time, this can substantially increase your return.
A £100,000 investment earning an average of 8% per year, would return £140,000 assuming a simple monthly interest return of £666.67. However, if you add the additional uplift from compound interest, this will increase to £148,984 – an additional £8,984.57. To find out about how compounding works, click here.
- Rebalance your portfolio
Reducing exposure to funds that have a high allocation to inflation-sensitive assets could offer some additional protection against any further surprise upticks in inflation.
In August, prior to the UK Government taking action to cap the maximum price that consumers and businesses could be charged for energy, Goldman Sachs predicted that inflation could grow as high as 22%. But even with the government’s intervention, inflationary concerns from the ongoing war in Ukraine are not limited to energy. Food is another example. By the end of September 2022, UK food prices had also increased, by 10.6%.
Investors looking to navigate any potential inflationary shocks should consider whether they have a need to reposition their portfolios. A benefit of the Moneyfarm service is that changes are made to client portfolios when such a need arises. You can find more details about this, here.
- Consider unusual mortgage options
The mortgage market has been another source of turmoil in recent weeks. The UK Government’s ‘mini budget’ in September triggered the mass withdrawal of mortgage products as lenders struggled to guess how quickly interest rates might rise. As at the 30 September 2022, the Financial Times reported that some 1,600 mortgages products had been pulled from the market.
For homeowners and those responsible for commercial mortgages, that presents a challenge in locking down an affordable deal.
Across the UK, it is estimated that some two million homeowners are currently on variable rate deals, which typically become more expensive as the Bank of England base rate increases.
While lenders have withdrawn fixed deals with lower interest rates from the market and replaced them with products exhibiting higher rates, it might be worth exploring unusual options such as longer-term deals with shorter early repayment charge periods.
- Invest with Moneyfarm
As mentioned earlier the benefits of compound interest and investing can’t be ignored. Moneyfarm’s smart technology allows you to easily create a personal investor profile, choose your preferred portfolio and risk, and make a deposit. Find out more details here.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
