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Protecting your Investment from Inflation

Global inflation reached an all-time high over the last year. Luckily it is on the decline in many countries, and as of July, the UK is sitting at 6.8%, the USA at 3.2%, Germany at 6.17%, Australia at 6% and Singapore at 4.5%. Although inflation is declining for many economies and the prices of goods and services are lowering, countries like Argentina, sitting at 113%, Venezuela, at 398% and Zimbabwe, at 101%, are a real eye-opener of the effects global inflation has on fragile economies.

How does Inflation affect Investing and Saving?

For the individual, this means Inflation could seriously affect the value of investments and savings.

Many people spend their whole lives saving for retirement, and suddenly inflation increases to new heights for a year or two. This means their capital loses value, and they need more to fund their retirement, especially those nearing retirement or in retirement who are not able to rebuild capital.

Having less capital for retirement means possibly downgrading their lifestyle at retirement or working past retirement to save up the shortfall.

Example of Inflation eroding Capital

The rule of 72 determines how long inflation will take to half your capital. If inflation is 7%, 72 divided by 7 equals 10.2 years. This means that your money would be worth 50% less in ten years. For a pensioner, this could mean they will run out of money earlier because of lingering inflation.

On the other end of the scale, with an inflation rate of 113% in Argentina, it would take six months to lose half your capital.

What caused Higher Inflation in the Market?

There are various reasons which include a shortage of supply when the demand for goods or services is high, increased costs in the production process causing prices to be hiked, global events that can cause shortages of goods, like the Ukraine war causing grain shortages, or even currency devaluation leading to higher import prices.

There are many more complex factors at play in causing inflation to rise, and many would not show up immediately, but they are usually exacerbated by global, geo-political and economic events such as war, energy shortages, import and export delays etc. A perfect example is Brexit in the UK combined with the pandemic, which brought the country to its knees as inflation skyrocketed and the cost of goods and services increased exponentially.

Some countries, like the US, have managed to bounce back from high inflation quicker than others, but the damage is already done for individual savers. Income has suffered under the price of goods increasing and the loss in value of its spending power.

Solutions to Protect Investors

Not doing something is the biggest risk of all – You’ve heard the term ‘anything is better than nothing’, and this rings true with investing. Any money in the market is better than none at all. If you have to wait till the stocks and bonds in the market are right before investing, you could be waiting forever. It is extremely difficult to time the markets, even for highly skilled investment specialists. Long-term investing is the cornerstone of any financial portfolio. – Long-term investing allows your money to grow with compounding interest over time. This is the foundation of a sound financial portfolio. Long-term investing also smoothes out any volatility in the markets over the years. Diversification – Diversifying a portfolio will help spread the risk of losses. Ensure your portfolio is suitably diversified between asset classes, sectors and regions, e.g. stocks, bonds and real estate.

It is prudent to use the services of a financial or investment advisor with the knowledge and skill to offer the best tax-efficient solutions for your individual financial needs to lower your overall risk against inflation and other threats to your investments.

Please note, the above is for educational purposes only and does not constitute advice. You should always contact your advisor for a personal consultation.

* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.

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