HomeBusinessInvest to beat inflation: Stocks and shares could offset rising costs

Invest to beat inflation: Stocks and shares could offset rising costs


Judging by recent weeks on the stock markets, you can understand why savers might feel like staying clear of investing. After spending much of the past two years pushing from one high to the next, markets have endured a tricky three months.

Concerns over monetary policy and now the tragic events in Ukraine have combined to wipe about 7 per cent off world markets.

Yet personal finance experts say investing remains one of the most reliable ways to grow your savings — provided it’s done responsibly.

Take stock: Despite the current stock market turmoil, personal finance experts say investing remains one of the most reliable ways to grow your savings - provided it’s done responsibly

Take stock: Despite the current stock market turmoil, personal finance experts say investing remains one of the most reliable ways to grow your savings – provided it’s done responsibly

‘Experiencing downs as well as ups is a normal, and inevitable, part of investing,’ says Rob Morgan, an analyst with investment platform Charles Stanley. He points out that, based on recent history, markets have dipped 10 per cent in most years — yet it hasn’t stopped them rebounding. 

What’s more, investing may be the least risky option at the moment, as it protects your savings against inflation.

We tend to think of inflation in terms of rising prices, but what it really means is that savings are losing their purchasing power. Inflation hits savers particularly hard, as their cash will be worth less when they eventually spend it.

So with inflation forecast to top 8 per cent – and savings accounts paying less than 1 per cent – how can you invest to ensure you don’t lose out?

Before you can put your cash into the markets, you’ll need to sign up with an investment platform – usually through their website.

Several stocks and shares Isa providers let you buy shares, funds and investment trusts directly.

In return for providing these services, investment platforms levy a small charge. This might be a percentage-based fee (i.e. 0.35 per cent of your portfolio), a transaction fee (i.e. £5 to buy or sell a share), or a combination of the two.

Slump: Concerns over monetary policy and now the tragic events in Ukraine have combined to wipe about 7% off world markets

Slump: Concerns over monetary policy and now the tragic events in Ukraine have combined to wipe about 7% off world markets

As the fees vary from one platform to the next, it’s worth working out which works best for you.

‘One of the best ways to maximise your investment returns over the long-term is to keep your costs as low as you possibly can,’ says Tom Selby, an analyst with investment platform AJ Bell.

Once you’ve found the right platform for you, the next question is how you want to invest your money.

Crucially, that means weighing up two particular things: how long you’re prepared to invest for and how much risk you’re willing to take.

Remember, you should only invest if you’re prepared to do so in the long-term — three years minimum.

As any investment expert will tell you, beating the markets in the short term is notoriously difficult. Instead, most investors aim to grow their capital long-term — including riding out temporary disruptions.

Savings threatened by inflation? Tempted to start investing? 

A simple (and potentially cheap) option is to top up your pension fund – find out how here. 

Your timeline may have consequences for how much risk you’re prepared to take. However, investors who can afford to tie down their money for longer may be prepared to take more risks.

‘Historically, those who have invested in stocks and shares have generally been rewarded over the long term,’ says Mr Selby. ‘But the price of this is often significant volatility in the short term.’

Whatever your risk-tolerance, though, there is one vital precaution you should take. To ensure your portfolio isn’t overly reliant on any one investment, diversification is key.

The nature of the global economy means different sectors and geographic markets perform differently.

‘If one of the investments is performing poorly, another could be making up for it,’ says Rob Morgan.

Judging risk level and ensuring adequate diversification may sound like a tall order for new investors. But there are ways to make it easier.

‘My £3,000 pot will build up over time’ 

Rachel Gardiner was drawn to Nutmeg due to its low fees and 'socially responsible' investment fund

Rachel Gardiner was drawn to Nutmeg due to its low fees and ‘socially responsible’ investment fund

First-time investor Rachel Gardiner signed up to online investment manager Nutmeg to grow her cash savings.

‘I’d saved about £3,000 from a cleaning job and liked the idea of turning a small pot into something bigger over time,’ says Rachel (left).

The 23-year-old was drawn to Nutmeg due to its low fees and ‘socially responsible’ investment fund.

She has already experienced the sharp end of investing — market volatility wiped 6 per cent off her savings. 

‘Luckily, I’ve read enough to know it’s important not to panic and take money out,’ she says. ‘I plan to invest for a few years, so I can wait for it to recover.’

As a mixed-asset portfolio, Nutmeg can be good for small investors who otherwise might struggle to diversify capital across different funds.

It is designed to ensure savers’ money is spread across different stock markets and defensive assets which mirror global performance.

Likewise, the funds are also useful for savers who might want to pay in at irregular intervals, as there is no minimum investment beyond an initial deposit of £500.

One is investment funds — retail investment products which spread your money across several shares.

There are about 40 different fund sectors, focusing on different countries (i.e. UK, Europe, U.S.) or industries (i.e. technology, property). 

As these funds are registered in the UK, they can be a cheap, safe way of investing cash in overseas markets. It’s worth doing some research to choose the right funds for you. 

Make use of your investment platform: it should let you track how funds have performed over time, as well as providing information on their strategy and which funds they contain.

Your platform may even have a list of funds they’ve picked for first-time investors, such as AJ Bell’s ‘favourite funds’. But don’t worry if picking out funds still sounds daunting. There are alternatives.

In recent years, various firms have developed special funds intended as a ‘one-stop shop’ for investors.

These ultra-diversified funds are intended to mirror the global stock market and provide what’s called a ‘mixed asset portfolio’.

Vanguard’s LifeStrategy range and BlackRock’s MyMap are popular examples.

Robo-investors such as Nutmeg function in the same way, using algorithms to provide customers with a pre-diversified portfolio.

It’s worth noting that investment funds will typically charge an annual fee (which is separate from your platform fee).

This is typically between 0.10 per cent and 1.20 per cent depending on the level of management. Your investment platform’s digital dashboard will let you see how your investments are performing over time.

Remember that the aim is to grow your overall portfolio, so don’t become overly distracted by the performance of individual assets.

A common trap is to sell slower funds and re-invest the money into your top performers — only to regret the decision when the economic winds change.

If you’re investing a lump sum for the first time, it may be worth doing this over time — a technique known as drip-feeding.

As recent performance has shown, markets will often have good months and bad months.

By investing your cash over several months, you reduce the risk of being disproportionately affected by the latter. If markets do hit a rough patch, keep things in perspective.

While dips can sometimes be sharp and sudden, they’re typically cancelled out by bigger gains in the long-run.

Of course, these slow and steady gains don’t tend to make headlines — but they make a much bigger impact on the average portfolio.

Fund tips to save your cash from a crisis

Make a splash

  • Peter Hargreaves, chairman of Blue Whale
  • Pick: LF Blue Whale Growth
  • Five-year return on £10,000: £18,600

‘Inflation is a worry for investors, so I’d recommend LF Blue Whale Growth Fund (which I chair and invest in). It invests in companies with superior pricing power and high gross-margins (to protect against inflation).

‘Holdings include Microsoft, Adobe, Visa and French luxury goods group Kering.’

Global gains

  • Dame Helena Morrissey, chairman, AJ Bell
  • Pick: Monks Investment Trust
  • Five-year return on £10,000: £17,200

‘For many balanced investors, exposure to global equities is crucial for a portfolio. Monks provides an actively managed trust from the Baillie Gifford stable.

‘Monks is far more diversified and less volatile than its Scottish mortgage cousin. And it still has the growth focus for which Baillie Gifford is known. It backs Tesla, Alphabet (Google) and Microsoft.’

Safety first

  • Merryn Somerset Webb, personal finance expert
  • Pick: Ruffer Investment Company
  • Five-year return on £10,000: £13,200

‘Inflation is high and monetary policy is tightening, so the right investment is one designed for today’s conditions, rather than the past ten years of low interest rates. The Ruffer Investment Company has been preparing for this inflationary environment. There are index-linked bonds, banks, big oil companies, plus commodities.

‘It may not sound as exciting as recent big winners, but it’s a better place to be for capital preservation.’

The long game

  • Ian Lance and Nick Purves, co-managers, Temple Bar Investment Trust
  • Pick: Temple Bar Investment Trust
  • Five-year return on £10,000: £9,200

‘Temple Bar trust (which we have managed since November 2020) primarily invests in UK equities — a sector that still appears cheap.

‘We buy shares that look cheap relative to the intrinsic value of the business, such as Royal Mail, Marks & Spencer, Royal Dutch Shell and NatWest.

‘If these shares are left to compound for several years, satisfactory results should follow. It is up 20 pc in a year and has high exposure to sectors that have done well during inflation.’

Go for gold

  • Maike Currie, investment director, Fidelity International
  • Pick: Ninety One Global Gold Fund
  • Five-year return on £10,000: £16,700

‘Gold keeps its value in troubled times and is seen as a hedge against inflation. Investors can be prepared for geopolitical shocks with an investment portfolio that spreads the risk.

‘The Ninety One Global Gold Fund, one of our Isa fund picks, invests in a diverse portfolio of gold mining firms.

‘It also has the flexibility to buy physical gold Exchange Traded Funds and shares in firms that mine other precious metals.’

Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.


Source link

Must Read