Im­pact of ris­ing prices on in­vest­ments

Leek Post & Times - - BUSINESS WEEKLY - Ad­vice col­umn From Brian Mel­lor Fi­nan­cial Ser­vices Oliver Mel­lor Dip PFS, BA (Hons)

A POUND saved is a pound earned. But thanks to in­fla­tion, over time, the value of the pound saved could be much less than when it was earned. One can­not ig­nore the cor­ro­sive im­pact of ris­ing prices on in­vest­ments.

In­vestors can eas­ily fail to pre­pare for the risk of in­fla­tion erod­ing the pur­chas­ing power of money, espe­cially in a low-in­fla­tion en­vi­ron­ment. Thus it is wise for port­fo­lios to in­clude as­sets that pro­vide some pro­tec­tion against un­ex­pected in­fla­tion.

After two years when con­sumer prices in the UK barely rose, there are signs that in­fla­tion may be about to re­turn. If it does, how should you pre­pare? To pro­tect your pur­chas­ing power over time, your sav­ings need to grow at least as quickly as prices are ris­ing.

The Bank of Eng­land fore­casts that con­sumer price in­fla­tion will re­main above two per cent in each year un­til 2021.

While nowhere close to his­toric highs, higher in­fla­tion stands in con­trast to near record low in­ter­est rates of­fered on cash sav­ings. Higher in­fla­tion rep­re­sents a hike in the cost of ev­ery­day liv­ing and the higher it rises, the less your cash will be ul­ti­mately worth. Ris­ing in­fla­tion weighs on both real wages and sav­ings re­turns for UK con­sumers.

Keep­ing enough cash aside to cover any fore­see­able costs you might face is al­ways sen­si­ble, typ­i­cally three to six months of your monthly out­go­ings.

How­ever, re­ly­ing solely or overly on cash might prevent you from achiev­ing your long-term fi­nan­cial goals, which may only be pos­si­ble if you ac­cept some level of in­vest­ment risk.

Worse, in an en­vi­ron­ment where the cost of liv­ing is ris­ing faster than the in­ter­est rates on cash, there is a dan­ger that your sav­ings will slowly be­come worth less and less, leav­ing you worse off down the road.

If you are pre­pared to take on some in­vest­ment risk, you could look at in­vest­ing in a bond fund to look for higher re­turns. Bond funds in­vest in a bas­ket of IOUS is­sued by gov­ern­ments and/ or com­pa­nies look­ing to raise cash. When some­one in­vests in a bond, they are es­sen­tially lend­ing the bond is­suer their money for a fixed pe­riod of time.

But higher in­fla­tion can also be bad news for in­vestors in bonds. Bond­hold­ers re­ceive reg­u­lar in­come pay­ments, known as ‘coupons,’ from the gov­ern­ment or com­pany that is­sued the bond.

Broadly speak­ing, bonds are typ­i­cally viewed as a lower-risk op­tion than shares and gen­er­ally of­fer a rel­a­tively steady and pre­dictable in­come, though some bonds do carry higher risk than some shares.

Opt­ing for a bond fund can help you di­ver­sify your risk but these port­fo­lios come in many guises and some will carry greater in­vest­ment risk than oth­ers. Gen­er­ally they will all hold bonds that are at var­i­ous stages of their life and there­fore will vary in value.

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