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July update: news, opinion and comment for your financial wellbeing 

How we inflation-proof your portfolio

Last month we talked about the recent rise in inflation, and what to make of it in an historical context. For investors, it’s important to take a step back and look at the big picture before acting on breaking news. 

But what if inflation does get out of hand, and stays that way for a while? 

The Bank of England has warned that inflation, currently at 2.1%, could rise to over 3% before the end of the year, before settling into a more regular pattern next year. 

But we also know the future remains uncharted. Nearly any outcome is possible, and none is inevitable. This means diversified investing remains our preferred strategy for being prepared for whatever the future holds.

Explaining inflation doesn’t predict it

If higher inflation does materialise, will it arrive sooner or later? Will it be moderate or severe? Brief or prolonged? Forecasts vary widely, because we often forget the academic evidence that informs us. Even excellent explanatory models rarely serve as effective predictive models. 

For example, scientists can readily explain why earthquakes occur, but our ability to forecast times, locations and severities remains shaky at best. 

The same can be said for inflation. We can explain its intricacies, but accurate predictions remain as elusive as ever. There are simply too many variables: COVID-19, climate change, political action, the Bank of England, other central banks, consumer banks/lenders, consumers/borrowers, employers/producers, employees, investors ('the market'), sectors (such as real estate, commodities, and gold), the pound, euro and dollar, global currency, cryptocurrency, financial economists, the media, the world, time … and YOU. 

Each of these could throw off any predictions about the time, degree, and extent of future inflation. Besides, as an investor, you really only have control over the last two: you, and your time in the market. What will you do with your time?

Because we don’t know, we diversify

It stands to reason: some investments seem to shine when inflation is on the rise. Others deliver their best results at other times. Because we never know exactly when inflation might rise or fall, we believe an investor’s best course is to diversify into and across various investments that tend to respond differently under different economic conditions.
For example, until earlier this year, value stocks had been underperforming growth stocks for quite a while. You may have been tempted to give up on them during their decade-plus lull (during which inflation remained relatively low). And yet, when inflation is high or rising, value stocks have tended to outperform growth, as has been the case year-to-date. 

Your globally-diversified portfolio will already put you in the best position to manage higher inflation over time, which means your best next step is most likely to stay put. 

Equities vs. inflation: it’s a no-brainer

Provided time is on your side, the stock market is your greatest ally against inflation. 

Over time, global stock market returns have dramatically outpaced inflation. For example, as reported by Dimensional Fund Advisors, £1 invested in the UK Market Index from 1955–2021 would have grown to £1,391 by the end of 2020. Had that same £1 been held in 'safe' one-month treasury bills over the same period, it would have grown to £56.84, whilst inflation over the same period has turned £1 into £28.22.

That treasury bill growth is not nothing, and it's welcome relief during bear markets. That’s one reason we advise maintaining an appropriate mix between wealth-accumulating and wealth-preserving investments. 

But what’s ‘appropriate’? It depends on your personal financial goals. The point is, as long as you have enough time to let your stock allocations ride through the downturns, you can expect them to remain well ahead of inflation simply by being in the market.

It’s important to add, no fancy market-timing moves are required or desired when participating in the stock market. In fact, moving holdings in and out at seemingly opportune times is more likely to detract from the vital, inflation-busting role stocks play in your portfolio. 

In the words of Nobel Laureate Eugene Fama: “The nature of the stock market is you get a lot of the return in very short periods of time. So, you basically don’t want to be out for short periods of time, where you may actually be missing a good part of the return."

That’s all very well and good if you are still earning and contributing to your portfolio. But what if you’re already retired? We’ll be discussing that in next month’s newsletter. But of course, please get in touch if you want to talk about it before then.  

Could your pension be paying for Covid? 

As England reopens and we take baby steps towards the 'new normal', the question arises: who's going to pay for the Government's estimated £500 billion Covid bill?

Rumours abound that personal - and potentially, state - pensions are going to have to bear some of the burden, perhaps with reform of higher rate tax relief, a reduction in the lifetime allowance or the breaking of the triple lock all on the table for the next budget.

Whether these threats materialise is anyone's guess. But even if they do, they shouldn't affect your retirement saving goals. There are strategies you can implement NOW that mean your pension will be able to cope with whatever the chancellor can throw at it. 

Read more about it in our latest blog.

Crypto corner

The latest from the weird world of bitcoin and other cryptocurrencies.

If you've ever been told to, "have fun staying poor" because you're resisting the bitcoin bandwagon, read Why we shouldn't listen to Crypto Experts by Jemima Kelly in the FT. (Google the title if you don't have an FT login - you should be able to open the full article in search results).

Bitcoin scam ads on social media have been using celebrities as endorsers without their knowledge. One retired teacher lost £125,000 in one such scam. It infuriated Money Saving Expert Martin Lewis, who's long railed against scams featuring his image.
The Financial Conduct Authority has got involved, ruling that Binance, the world's largest cryptocurrency exchange, cannot conduct regulated activity in the UK - although as Binance is not UK-based, it will have little effect on its service. 

If you think we're banging on about BItcoin a lot lately (this is the third - or is it the fourth? - month we've covered the subject), it's because cryptocurrency trading combines an extreme version of the worst aspects of active investing (gambling) combined with the potential for very dodgy illegal activity - hence the big red flag from the FCA. As a responsible financial planning firm, there's zero chance we'd recommend you go anywhere near it. 

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