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Wealth Planning -
Rising inflation, rising interest rates: save or invest?
Post-covid fall out, Brexit and the war in Ukraine have led to market turmoil. As central banks look to temper inflation, it raises interesting questions for investors.
The fallout from the 2008 financial crisis has dominated the global financial landscape for well over a decade.
In the shadow of the 2008 crash, central banks took unprecedented action to prop up economies with large-scale bond buying.
This quantitative easing pumped money into economies, kept prices consistent in the markets and, in short, provided much-needed stability to the global economic ecosystem.
Another tool central banks used, almost universally, was to keep interest rates at historic lows and in some cases in the negative. That was great news for borrowers, but bad news for savers.
As a result of this, some economic phenomena have been taken as a given - low interest rates, low inflation, and generally steady stock market growth.
How low inflation and interest rates discourage savers
Inflation has been low but so have interest rates.
People’s savings have not been earning much interest, and their real-terms loss in value has been limited by low inflation levels. For example, if inflation is 2% and you receive 1% interest on your savings after tax, the impact on your purchasing power, or “real” loss is 1%.
Those wanting above-inflation gains to their savings only needed to beat modestly low inflation to end up on top.
That time is over.
Central banks across the world are increasing rates and the long post-covid recovery, compounded by the Russian invasion of Ukraine has hit the markets hard and created a bear market. It can be hard to feel confident about investing when markets are down, however, sometimes the best opportunities are presented when things look their worst[1].
Five ways to protect your capital at times of market uncertainty
1. Review your cashflow
It is important that you understand your sources of income and the assets you have, what purpose they serve and when you need to access them.
Wealth Planners use cashflow modelling tools to help you visualise your financial future, taking into consideration your sources of income and wealth, how you might structure and access these throughout your life.
By mapping out your planned income and expenditure, you can identify opportunities for longer-term planning. If you have assets, you do not need to access for five years or more, investing can help you grow your assets with a view to beating cash returns.
2.Cash rates
Everyone needs cash - the amount you need and how long you need it for will be personal to you and your circumstances. Savings rates are higher than they have been for decades, and the best are found in fixed term deposits, but in a rising interest rate environment, you need to decide how much and for how long you want to fix.
If you believe that interest rates might increase over the next 12 months, and that more attractive rates are yet to come, you could spread your money over fixed term deposits over different periods of time and interest rates. This approach is known as laddering and offers you more flexibility, allowing regular access to your money on each maturity.
3. Diversify
Diversifying your investments reduces your exposure to risk. If one asset class is performing badly, others may stay the course. By investing in a mixed asset portfolio, you have exposure to underlying investments which react differently to external factors.
Assets might include shares, government and corporate bonds, commodities - such as precious metals, oil, or crops – commercial property, hedge funds, and foreign exchange.
Over time, diversification mitigates short-term volatility by spreading your portfolio across different asset classes and strategies while active management allows you to benefit from short-term market opportunities.
4. Tax efficiency
Investing into tax efficient vehicles, such as ISAs and pensions, allows you to grow your wealth free from income and capital gains tax. Through reinvesting gains, you will benefit from compound growth over time.
A Wealth Planner can advise on the most tax efficient structures for your wealth, and that of your family and business.
5. Protect your assets
During times of uncertainty, it is important to protect what matters you . This could mean a lump sum to provide financial security should the unthinkable happen. Business protection can also help stabilise a business, giving you the financial cushion, you might need, should the unexpected occur.
So, should you save or invest?
If you have cash, you do not immediately need, a combination of short- and medium-term cash savings, coupled with a longer-term investment strategy could provide the wealth protection you need. However, everyone’s circumstances are individual, and it is always advisable to seek professional financial advice to ensure you have the right strategy in place for you, your family, and your business.
Further Reading
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This communication should be considered a marketing communication. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research. It is for information purposes only and does not constitute advice, a solicitation, recommendation or an offer to buy or sell any security or other investment or banking product or service. You should seek professional advice before making any investment decision. The value of investments, and the income from them can fall as well as rise, and may be affected by exchange rate fluctuations. Investors could get back less than they invest. Past performance is not a reliable indicator of future results. The tax treatment of investments depends upon individual circumstances and may be subject to change.
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