Where to look in the hunt for growth and what are the risks to consider?
Inflation has sat below 2% for almost two years now and there is little sign that it is going to rise in 2016. At first glance it may seem that low inflation is good for your investments – you don’t have to make much of a return to beat an inflation rate of 0.1% after all. But, even a tiny inflation rate compounded over time can erode your wealth.
“In the last 15 years, if you had done nothing at all with your money it will have more than halved in value,” says Rob Burgeman, Investment Manager and Divisional Director at Brewin Dolphin. “Low rates of inflation compounded up over long periods can be really quite detrimental to the health of your wealth.”
Low inflation and your investment portfolio
Over the past 10 years, the retail price index (RPI) has risen by 34.5%. Assuming that low inflation means your investments don’t have to work very hard is therefore a big mistake.
The combination of low inflation and low interest rates means it is very difficult to make your investments grow. “Interest rates will remain lower for longer in a sluggish growth environment,” says Tom Stevenson, Investment Director for Personal Investing at Fidelity International. “Against that backdrop, there is no reason to believe that 2016 won’t be another year of hard-won gains.”
With inflation, you must remember that the rate is affected by a variety of factors. The latest inflation figures showed food prices continuing to fall as we near 18 months of price wars between the supermarkets. Investors may want to steer clear of food retailers. The tumbling oil price has also had a major effect.
But, the price of clothing and footwear rose by 2% between September and October as people felt better off and hit the shops. People are also spending more on leisure goods, such as computer games or consoles, according to the Office for National Statistics.
Balancing the risks
Despite a low inflation rate, certain areas of the economy are performing reasonably well. This means there are investments out there that offer real returns if you know where to look. Just make sure you don’t start taking unnecessary risks in the hunt for growth.
“You shouldn’t take an undue level of risk in order to achieve an income goal,” says Burgeman. “Just because you are prepared to take a bit of risk, doesn’t guarantee you a greater return.”
But the safest investments do tend to suffer most in a low inflation environment. Interest rates are down due to low inflation, meaning cash savings are earning pitiful returns. At the same time, the Government is paying smaller interest rates on its debts, meaning safe houses like gilts aren’t offering impressive returns.
“The key to investing in the current environment is getting the balance right,” says Burgeman. “You want to balance security against understanding that you need to take some degree of risk to make sure your money keeps pace with inflation. In general, that means investing in a basket of assets.”
The key is not to just look at which investments perform best in times of low inflation and then pile your money in. Certain stocks may be delivering impressive returns but they could carry far more risk than you should be considering. The best thing you can do is get professional advice so that your investment portfolio is aligned to grow despite low inflation, but still matches your risk profile.
The value of investments can fall and you may get back less than you invested.
The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.