Inflation exceeded 11% in October, according to the Office of National Statistics. This is the most rapid rise we’ve seen in decades.
Prices are spiralling far faster than expected, due to the ongoing war in Ukraine, residual effects of the pandemic and surprisingly strong consumer demand. So, what does this mean for investors? Is the value of your life savings being eroded? What should you do to limit the damage?
There’s no denying all investors are being negatively affected by this year’s escalating rates of inflation and anyone who tells you otherwise is delusional.
The temptation is to flee the markets or take your chances with an expensive active investment strategy. However, research shows sticking with a broadly passive, evidence-based approach to investing is much more sensible. Here’s why:
There’s no way to avoid inflation
No matter what you invest in, it will be negatively impacted by inflation. Cash is an obvious example, but bonds will fall in value too due to increasing yields.
Commodities may look like the solution, as prices usually rise when inflation accelerates, but if you aren’t already invested in this market, it is too late to change horses now. Prices have already increased.
Predicting market movements is almost impossible
When we face such economic instability, it is extremely hard to predict how much further prices will rise or this period of inflation will last.
Some forecasters are optimistic, others much less so – they can’t all be right. Most believe that inflation has peaked in some countries, but the UK may still have some way to go. The Bank of England is expecting inflation to reach around 13% by the end of this year and continue at ‘elevated levels’ through the next 12 months.
The rebound may be worth the wait
There is almost never a good reason to sell your investments once the market has fallen sharply. Eventually they recover, sometimes pretty quickly and it is hard to predict when this might happen.
Yes, inflation could persist for longer than anticipated, but it could also run out of steam far sooner than predicted. If you sell now, you will miss out when the markets recover.
Diversification remains the sensible option
Let’s go back to my original question – what can you do to limit inflationary damage on your investments?
As we have always advocated, a diversified portfolio provides some protection from market movement by giving you the highest expected risk-adjusted return overall. Research shows this strategy tends to produce better returns over time, which is why consistency in investing is so important.
Don’t be tempted by a ‘solution’
No one has a crystal ball and if anyone offers you a ‘solution’ to the inflation problem, be very cautious.
For what it’s worth, my advice is stay calm and let time smooth out this big old bump in the road. Stick to a strategy that is founded on data and evidence and the markets will do the rest.
To find out more about Belmayne’s approach to investing or the current market volatility, call us on (01246) 298181 or email: enquiries@belmayne-ifa.com
