Inflation Beating Investments: Strategies to Protect Your Money
Inflation is a persistent increase in the general price level of goods and services in an economy. As a result, the value of money decreases over time, leading to the erosion of purchasing power.
Inflation can affect all aspects of life, from everyday expenses to long-term investments. This article will examine strategies to help investors beat inflation. We will focus on investments that can outpace the rate of inflation.
What is Inflation?
Over time, inflation measures the rate at which prices for goods and services increase. It is usually measured using the Consumer Price Index (CPI). The CPI tracks the prices of common household goods and services.
Using the CPI, we can calculate the inflation rate, which reflects the percentage of price increases over time.
Historical Inflation Rates over last 10 Years
Here is a table showing the annual inflation rate in the UK for the last 10 years:
|Year||Inflation||5 Year Average|
Source: Office for National Statistics
The inflation rate is the percentage increase in the general level of prices over a period of time. It is measured by comparing the price of a basket of goods and services in a given year to the price of the same basket of goods and services in a base year. The inflation rate in the UK is monitored by the Bank of England, which has a target of 2% inflation per year.
How Inflation Impacts Investments
It is important to remember that inflation can significantly affect investments, especially those that generate a fixed income or those with a long maturity period.
An investor’s purchasing power will decline over time if inflation exceeds the rate of return on investment. Inflation is 6% per year. As an investor, if you own a bond that pays 3% per year, the real rate of return is -3%. This means you are losing money.
Capital Protected Inflation Linked Deposit Plan
100% of any growth in the Retail Prices Index (RPI) over the term of the plan
- No cap on the maximum return available
- Additional 2% bonus payment if the FTSE 100 Index has gone up by any amount over the term of the plan
- 4 year term
- Available for cash ISA, non ISA or ISA transfer
- Capital Protected – receive your initial capital back at the end of the term no matter how the RPI Index or FTSE 100 Index perform
Strategies to Beat Inflation
- Equity Investments – Shares have historically been one of the best inflation-beating investments. Due to the ability to adjust prices to keep up with inflation, companies’ earnings tend to rise with inflation as well. However, not all shares are created equal. Investors should focus on companies with a competitive advantage and a strong record of earnings growth.
- Property – Property or real estate is another asset class that has historically outperformed inflation. Property prices tend to rise with inflation, and rental income can be adjusted to keep pace with inflation. Additionally, property can provide diversification benefits to a portfolio.
- Commodities – Investments in commodities, such as gold, silver, and oil, are often considered inflation hedges. This is because commodities tend to rise in price with inflation, and they can add diversification to a portfolio. Commodities, however, can be volatile and should make up a small portion of an investor’s portfolio.
- UK Index Linked Gilts – UK index-linked gilts are government-issued bonds that adjust their nominal coupon payments and final settlement repayments to account for inflation. Consequently, the bonds’ coupons and final settlement amount retain their real (i.e. inflation-adjusted) value over time, thus helping protect your investment from inflation.
- High-yield Bonds – High-yield bonds, also known as junk bonds, are typically issued by companies with low credit ratings rated below BBB. To compensate investors for the added risk, they tend to offer higher yields than investment-grade bonds. A high-yield bond can provide an attractive source of income and inflation protection even though they are not without risk.
- Structured investment products – Structured investment products are typically designed to provide a specific return profile in response to varying market conditions. These products can provide a range of benefits depending on the investor’s risk appetite, including inflation linked or defensive investment options where your money is protected in real terms. They can also offer a more diversified approach to investing than an individual bond or stock. Structured investment products can be complex and should be carefully evaluated before investing.
What is an inflation-beating investment?
What is the best investment for inflation protection?
How does inflation affect the stock market?
Should investors avoid fixed-income investments during inflationary periods?
Is gold a good investment for inflation protection?
What is the historical average inflation rate?
Can inflation ever be good?
How can investors protect their portfolios from inflation?
How often should investors review their portfolio for inflation protection?
Can inflation be predicted?
A fact of life is that inflation can reduce the value of investments over time. Investing wisely, however, can protect investors’ purchasing power and even outperform inflation.
Equity investments, property, commodities, index-linked gilts, and high-yield bonds are all strategies that can help investors beat inflation. Before making an investment decision, investors should always consider their risk tolerance, investment goals, and time horizon.