The Situation With Inflation
During the Nineteen seventies, inflation was more than 20%, due to a trebling of the price of oil, the result of which appeared to be made worse by competing trade union demands for compensating pay increases.
Both the impact of oil price increases and union power have reduced, yet the latest and unforeseen factor dominates, that is the easy money made available by Governments to keep their financial systems going in the wake of the world economic crisis.
Easy money results in low interest rates, and interest rates have now been lower for longer than at any other time. Ultimately, this invites inflation.
Governments then raise rates of interest to dampen demand, but most tend to be reluctant to act for concern with stifling economic recuperation.
With signs that UK rates are set to go up, investors find themselves in a similar predicament as in the 1970s – how best to counter the impact of inflation?
Cash deposits are currently a sure-fire way for losing capital value, but moving up the risk scale, Government and corporate bonds may also lose value as increases in interest rates make currently available rates much less desirable.
Most investors will certainly be focused on the new issue of Index-Linked National Savings Certificates which is due to become available in the current tax year.
An additional alternative to cash is the absolute return funds whose expressed objective is to gain returns greater than those available on deposits. These funds normally invest in a wide array of different types of financial asset, typically including futures and options and other financial “derivatives”.
All portfolio alterations ought to be limited as far as possible to modifying agreed techniques. The all-weather portfolio constituent is likely always to be the equity share, whose resilience to inflation is based upon the assumption that the products and services are portrayed in current currency terms.
Nations having weaker currencies import inflation through the increased prices they must pay for imports. Similarly, the effectiveness of overseas currencies can benefit overseas portfolio holdings.
Complementing equities, property, either UK in addition to global, usually provide desirable yields, and bricks and mortar have always presented some reassurance over time.
Risk
Investment calls for balancing risk and return. The less hazardous the investment, the lower the yield is likely to be; and people searching for more significant earnings must take a lot more risk.
Most investors start out with deposits, which remain part of their particular investment arrangements. Still, even deposits involve risks, particularly the actual risk that the deposit taker could default – though as much as ?85,000 for each investor per UK institution is protected with the Government compensation scheme.
More significant earnings can be obtained by stock market investment, however these are usually susceptible to a greater array of dangers: the price of individual investments might slide and the currency in which the investment is denominated may possibly decrease. Also, the investment managers can make unfavorable decisions.
The best approach in managing risk is in fact diversification. No one can be certain of exactly what the foreseeable future holds, but a judicious combination of higher along with lower risk investments, and which is evaluated routinely, should make sure that gains more than make up for losses and that a beneficial return is produced above inflation.
Life often involves hazards, and investment is no different. The challenge is to control risk and also to transform risk to advantage.
Dealing with the rise and fall of inflation has developed into a dilemma for many investors. Determining risk variables is now an integral component of wealth management.
Using the substantial experience and knowledge of Price Bailey Chartered Accountants, these elements are reduced in developing an investment portfolio.
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