Inflation around the world has started to soar again. As a young man of the seventies I remember only too well how devastating inflation was. It averaged in the teens for the entire decade. Can you believe it?
There are a number of lessons to be learned from the seventies as an investor. The main one of which was to invest in so-called real assets. In other words, assets that are capable of maintaining and beating inflation.
There are four main asset classes which are;
Cash (bank and Building Society accounts)
Bonds (corporate bonds and government stocks)
Property (commercial property – offices, retail and industrial)
The only two real assets are equities and property. In times of rising inflation, all things being equal, you should seriously consider investing the largest proportion of your investable assets into these two areas. This does of course presuppose you are investing long term, 10 years or more, and you have the right attitude to investment risk.
With UK inflation (CPI) at 6.2% p.a. at the time of writing and interest rates from bank and Building Society accounts typically less than 1% p.a. it means you are losing approximately 5% a year in real terms (inflation adjusted).
As for bonds, well I consider them a lost cause at this stage of the economic cycle. As interest rates rise, and they could well rise a lot over the next 2-3 years, the value of bonds will plummet. In my opinion, it is inevitable.
Bonds produce income in the form of interest and have the potential for capital gain (unlikely presently) or capital loss (likely currently). The income yield from bonds is very low currency, like cash, so you are losing money in real terms by about 5% a year typically and you are highly likely to experience an actual capital loss in value, let alone the impact of inflation.
Whilst these are the four main assets recommended by financial planners there are others worth a mention. For example, commodities are worthy of a mention. The demand for commodities is likely to rise substantially over the next few years and the price is likely to rise too. As for precious metals such as gold, the price of these should rise significantly over the next few years too. Read my blog on gold.
So there you have it. How can you benefit from investing in real assets and avoid investing in bonds and cash. Well, by investing in the Discretionary Fund Management service run by our sister company Minerva Money Management. If you are interested in finding out more about this service do get in touch. You know it makes sense.*
*The value of your investment can fall as well as rise and is not guaranteed. The contents of this blog are for information purposes only and do not constitute individual advice. You should always seek professional advice from a specialist. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.