Strategies for Protecting Your Assets from Inflation Increases

Strategies for Protecting Your Assets from Inflation Increases

In the current economic climate of the United Kingdom, with ongoing risks of stagflation and high inflation, it's crucial for investors to safeguard their portfolios. Here's a guide on how to create a well-rounded portfolio that can help protect against inflation.

To begin with, a diversified allocation to inflation-resilient assets is key. These include inflation-protected securities, such as UK equivalents of inflation-linked bonds, real assets like real estate, commodities and precious metals, defensive equities, and asset-backed securities with floating interest rates.

Inflation-protected securities, similar to US TIPS, increase in principal and payments with inflation. Real estate tends to appreciate with inflation and rents often rise, offering a hedge. Commodities and precious metals, like gold and silver, often increase in value during inflationary periods. Defensive equities in sectors like consumer staples, utilities, and energy have pricing power to pass inflation onto consumers. Asset-backed securities with floating interest rates also help preserve returns during inflation.

Geographical diversification is another strategy to consider. Holding international assets or foreign currencies can help reduce the impact of localized UK inflation and currency depreciation. Reducing cash holdings is also advised, as cash loses purchasing power quickly in inflationary regimes.

Active management and flexibility are essential in the current economic environment. Adjusting portfolios in response to policy changes and economic conditions is important to maintain capital preservation and a focus on real-return assets rather than nominal yields.

Gold prices have seen a significant increase over the past year, with a 32% rise in US dollar terms and a 30% increase against the pound. Gold is considered one of the most tried-and-tested means of protecting wealth against inflation, having been used as a store of value for nearly 6,000 years.

Stocks and shares can also be used as a means to hedge against inflation, especially over the long term. Sectors like healthcare, which are likely to face strong demand regardless of inflationary pressures, could be particularly attractive. However, investors should be selective in their inflation-busting investments, choosing household names that have the ability to pass higher costs on to consumers and restore profit margins.

REITs offer liquid access to real estate markets, but their performance can diverge from direct property investments due to stock market volatility. If the financial goal is five years or more away and investors are prepared to take risk with their money, the stock market could offer a better option to grow wealth and hedge against inflation.

In conclusion, a well-rounded UK portfolio to guard against inflation should combine inflation-linked bonds, real estate, commodities, defensive stocks, and global diversification while minimizing cash exposure and staying agile in allocation. With the ongoing risks of stagflation, it's essential for investors to stay informed and adapt their portfolios accordingly.

Sources:

[1] The Telegraph. (2021, October 26). How to protect your portfolio against inflation. Retrieved from https://www.telegraph.co.uk/personal-finance/investing/10382545/How-to-protect-your-portfolio-against-inflation.html

[2] Money Observer. (2021, October 22). How to protect your investments from inflation. Retrieved from https://www.moneyobserver.com/investing/news/how-to-protect-your-investments-from-inflation

[4] Citywire. (2021, October 21). How to invest in a stagflationary world. Retrieved from https://www.citywire.co.uk/wealth-manager/news-analysis/investment-ideas/a1561722/how-to-invest-in-a-stagflationary-world

1. To protect against inflation in the current UK economic climate, it's beneficial to invest in a diversified portfolio that includes inflation-protected securities, real estate, commodities, defensive equities, and asset-backed securities with floating interest rates.
2. Geographical diversification can also be applied by holding international assets or foreign currencies to reduce the impact of localized UK inflation and currency depreciation.
3. Active management and flexibility are essential in this economic environment, as adjusting portfolios in response to policy changes and economic conditions help maintain capital preservation and focus on real-return assets.
4. Gold, being a tried-and-tested means of protecting wealth against inflation, has seen a significant increase over the past year, making it an attractive option for investors.
5. Over the long term, stocks and shares in sectors like healthcare could be particularly attractive as a means to hedge against inflation, but investors should be selective in their inflation-busting investments and take risks commensurate with their financial goals.

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