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Strategies to deal with inflation

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
Avi777
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Strategies to deal with inflation

#389782

Postby Avi777 » February 24th, 2021, 10:25 pm

Hi,

Don’t know that much about finance. I have a couple of mortgages which includes a buy to let and moderate amounts of cash in various U.K. banks.

I am worried about what is happening with regard to potential inflation. Does anyone have any strategies to safe guard inflation wiping out my savings or in fact banks failing?

Am I better paying more into the mortgages? But then that erodes my pot of cash for a rainy day. Or buying gold as is a popular belief?

Any tips would be appreciated.

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Re: Strategies to deal with inflation

#389892

Postby scarlettsmith694 » February 25th, 2021, 10:54 am

The London markets traded in the red zone as investors were waiting for further information regarding the government’s plan for the phased easing of business restrictions. FTSE 100 traded lower by around 0.40% amid investors’ concern regarding a spike in inflation due to the rising commodity prices.

NotSure
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Re: Strategies to deal with inflation

#390083

Postby NotSure » February 25th, 2021, 8:52 pm

Another newcomer/novice here, so I cannot offer any advice. In reddit-speak, I look forward to responses from the 'diamond handed OGs' :roll:

One comment - it seems that actual inflation is not the only danger. The nature of markets seem to mean that just the expectation of inflation is enough to cause problems. And I'm not talking double-digit 70's style. 10 year US treasury bonds have risen by over 15 basis points today, and tech stocks are (subsequently?) down by several percent. Since so-called global trackers can have 15-20% in just 6 companies - 'FATAMA' (TM): Facebook, Alphabet, Tesla, Amazon, Microsoft, Apple - and bonds can surely only go one way from here, I too am wondering were on earth to start. I guess starting up 12 years into a credit fuelled bull run was never likely to be straightforward.....

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Re: Strategies to deal with inflation

#390115

Postby midgesgalore » February 25th, 2021, 10:36 pm

Hi Avi777
If you don’t know that much about finance:

I would not be buying fixed rate bonds of any sort.
These bonds a pretty much an investment paying a life-long fixed interest rate, per bond, where the cost of buying them rises and falls in the market. If bank base interest rates decrease then the cost of a bond increases and the opposite is true where if base rates rise then the cost of a bond decreases

If inflation rises and governments tackle this in time honoured fashion by increasing the bank base rate then your bonds will still pay out the same as before but their market price decreases. Now fixed interest payments from your bonds are not keeping up with inflation and you also lose on a capital front as the bond price also reduces.

midgesgalore

Avi777
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Re: Strategies to deal with inflation

#390118

Postby Avi777 » February 25th, 2021, 10:49 pm

Thanks for your replies guys.

So what things are safe bets in these times of turmoil? Not after massive returns but just safety really. Better putting the money into the mortgages?

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Re: Strategies to deal with inflation

#390125

Postby midgesgalore » February 25th, 2021, 11:31 pm

Avi777 wrote:Thanks for your replies guys.

So what things are safe bets in these times of turmoil? Not after massive returns but just safety really. Better putting the money into the mortgages?


Buy to let is fair enough but I am at the point of divesting myself of them. For me it is too much hassle and the cost of ownership as a percentage of after tax income is more than paying fees on an investment trust or unit trust, even if the fees are getting on a bit. And there is always the risk of tenants not paying up. I had a pair of those during the 2020 lockdown trying it on just because my government made it harder to evict non-payers. That's fair enough if they are truly on their uppers but these folks still managed their trips to Spain.

Still, I got them out on a technicality however that's the first time this has happened in 10 years

What would be so wrong with a good core global oeic / Investment trust / ETF?
You should be in your investments for the long term

midgesgalore

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Re: Strategies to deal with inflation

#390136

Postby Dod101 » February 26th, 2021, 7:33 am

If we do get any serious inflation then fixed interest anything is not going to be a very good place to be. Good international shares should provide some protection as their prices will tend to rise with the reduced purchasing power of the currency. Your aim is to try to maintain purchasing power of your assets.

I would have thought that from the point of view of inflation protection, buy to let with a decent mortgage ought to be fine. The cost of your mortgage should fall (assuming you have a long term fix on the interest rate) and the value of the asset should rise, at least in nominal terms. Of course there are many other considerations about holding buy to let investments which will complicate the picture.

Fundamentally price inflation means reduced purchasing power of individual currencies and is usually accompanied by increased interest rates. Everything else flows from that. It would be a more 'normal' scenario for many UK investors and may even make them feel better off at least in the short term since nominal values of investments in shares and buy to let properties will probably rise.

Dod

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Re: Strategies to deal with inflation

#390211

Postby NotSure » February 26th, 2021, 11:30 am

Historically, holding assets has protected against inflation, but is that likely to be so true going forward, at a time when asset inflation seems so decoupled from RPI/CPI? Low CPI has been countered with extremely low interest rates and QE, which has in turn caused asset inflation. I find it hard to believe that a hike in interest rates, or even a tapering of QE, will boost the stock markets (as represented by a typical global tracker, heavy in growth stocks) and domestic house prices.

I am very new to all this (dumb money), but feel comfortable about pound cost averaging into the global markets over the next decade or two. But I am not sure I'd like to transfer a big lump of accumulated cash savings in one go right now.

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Re: Strategies to deal with inflation

#390361

Postby LooseCannon101 » February 26th, 2021, 6:55 pm

A good way of providing protection from inflation (currency devaluation) is from owning a broad range of income-producing assets from around the world.

As has been mentioned, one or more highly-diverse global equity investment trusts held in a tax wrapper e.g. ISA fit the bill perfectly.

Before buying any investment trust I would check out the underlying portfolio, discount/premium, general strategy and fund manager's experience over the long term e.g. 10 years+. Ideally, any trust should be held forever - at least until state pension age.

When your investing horizons are 30+ years, then investing in a global trust at any time is a good idea. Rainy day cash is also a good insurance policy.

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Re: Strategies to deal with inflation

#390369

Postby richfool » February 26th, 2021, 7:31 pm

If we do get a significant increase in inflation, the Gov will probably sort it out, by introducing a new measurement of inflation, perhaps the NPI,( New Price Index) instead of RPI or CPI. That should get the number down again.

In the meantime, I'm sticking with stocks (via investment trusts), some gold, some commodities & miners and some commercial property (REITS).

Regards,

Indy Nial

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Re: Strategies to deal with inflation

#390422

Postby tjh290633 » February 26th, 2021, 10:57 pm

You may be interested in this table, which compares various indices, and my own portfolio, all unitised to be comparable, with the RPI since 1987:

.            Income Units              Accumulation                  April       
Year to Unit Value Div/Unit Unit Value FT30 FT100 RPI RPI
21-Apr-87 1.00 0.00 1.00 1.00 1.00 1.018 1.00
05-Apr-88 0.91 2.86 0.94 0.92 0.91 1.058 1.04
05-Apr-89 1.18 2.72 1.28 1.10 1.05 1.143 1.12
05-Apr-90 1.21 4.24 1.40 1.13 1.14 1.251 1.23
05-Apr-91 1.34 5.42 1.69 1.28 1.26 1.331 1.31
05-Apr-92 1.30 7.52 1.75 1.24 1.26 1.388 1.36
05-Apr-93 1.51 6.91 2.13 1.44 1.46 1.406 1.38
05-Apr-94 1.70 6.27 2.50 1.65 1.65 1.442 1.42
05-Apr-95 1.66 7.48 2.55 1.57 1.62 1.490 1.46
05-Apr-96 1.95 7.38 3.13 1.80 1.90 1.526 1.50
05-Apr-97 2.16 8.40 3.62 1.85 2.21 1.563 1.54
05-Apr-98 3.31 10.00 5.72 2.45 3.05 1.626 1.60
05-Apr-99 3.44 8.46 6.12 2.47 3.21 1.652 1.62
05-Apr-00 3.32 11.33 6.13 2.42 3.35 1.701 1.67
05-Apr-01 3.29 12.42 6.32 2.05 2.89 1.731 1.70
05-Apr-02 3.37 13.02 6.76 1.65 2.69 1.757 1.73
05-Apr-03 2.29 12.10 4.85 0.85 1.85 1.812 1.78
05-Apr-04 2.92 13.38 6.56 1.22 2.25 1.857 1.82
05-Apr-05 3.46 13.06 8.10 1.33 2.51 1.916 1.88
05-Apr-06 4.30 17.42 10.57 1.68 3.06 1.965 1.93
05-Apr-07 4.91 19.42 12.63 1.90 3.31 2.054 2.02
05-Apr-08 4.14 24.32 11.21 1.58 2.93 2.140 2.10
05-Apr-09 2.28 21.17 6.46 0.87 2.01 2.115 2.08
05-Apr-10 3.69 11.06 10.86 1.33 2.91 2.228 2.19
05-Apr-11 4.16 16.71 12.76 1.43 3.03 2.344 2.30
05-Apr-12 4.40 17.73 14.19 1.33 2.96 2.408 2.37
05-Apr-13 5.27 21.83 17.01 1.54 3.29 2.476 2.43
05-Apr-14 5.34 23.05 18.88 1.75 3.38 2.557 2.51
05-Apr-15 5.91 24.98 21.84 1.91 3.47 2.580 2.53
05-Apr-16 5.92 22.67 21.72 1.79 3.17 2.614 2.57
05-Apr-17 6.62 26.21 25.47 2.10 3.76 2.706 2.66
05-Apr-18 6.12 33.19 24.66 1.79 3.62 2.797 2.75
05-Apr-19 6.35 31.25 27.04 1.95 3.82 2.856 2.81
05-Apr-20 4.50 31.57 20.59 1.44 2.77 2.926 2.87
26-Feb-21 5.66 22.83 27.49 1.65 3.33 2.946 2.89

You will note that the FTSE100 has been comfortably ahead of the RPI for much of that time. Sometimes it falls back, but that effect is short-lived.

TJH

Avi777
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Re: Strategies to deal with inflation

#390572

Postby Avi777 » February 27th, 2021, 12:40 pm

Sorry what does the above table mean?

Any idea then what are the best investments?

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Re: Strategies to deal with inflation

#390590

Postby Bubblesofearth » February 27th, 2021, 1:08 pm

Avi777 wrote:Sorry what does the above table mean?

Any idea then what are the best investments?


It means TJH has done really well compared to UK indices during his time as an investor.

This can be explained in a number of ways;

1. Survivor bias. It's unlikely anyone who has done really badly over that time would still be posting.

2. Avoiding the worst of the Dotcom crash and the GFC thanks to not having too much exposure to tech shares in the first instance and financials in the second. Most sectorially diversified equal weight on purchase portfolios should have achieved something similar.

3. Luck.

4. Skill.

Or a mixture of all of the above.

As I've mentioned elsewhere it's a shame we don't have a comparison with a Global tracker as that represents the best equity benchmark.

All IMO of course.

BoE

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Re: Strategies to deal with inflation

#390606

Postby dealtn » February 27th, 2021, 1:41 pm

Reading the OP, isn't the question all about savings (and banks) with respect to inflation, and not investments (and possibly as a result in the wrong place)?

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Re: Strategies to deal with inflation

#390879

Postby tjh290633 » February 28th, 2021, 12:17 pm

Bubblesofearth wrote:
Avi777 wrote:Sorry what does the above table mean?

Any idea then what are the best investments?


It means TJH has done really well compared to UK indices during his time as an investor.

This can be explained in a number of ways;

1. Survivor bias. It's unlikely anyone who has done really badly over that time would still be posting.

2. Avoiding the worst of the Dotcom crash and the GFC thanks to not having too much exposure to tech shares in the first instance and financials in the second. Most sectorially diversified equal weight on purchase portfolios should have achieved something similar.

3. Luck.

4. Skill.

Or a mixture of all of the above.

As I've mentioned elsewhere it's a shame we don't have a comparison with a Global tracker as that represents the best equity benchmark.

All IMO of course.

BoE

My view is that investing for an income has been the main factor. Over much of that period the FTSE350HY index outperformed the FTSE350LY index. The TR versions are 6537.88 for the HY and 5039.62 for the LY, which shows that the HY has done better since they were launched, in the 1990s, I believe, possibky 1992 when I have the UKX-TR at 1000. The LIX has done better in the last few years.

Regarding the Dotcom crash, I avoided all the tech shares, but Marconi caused me angst. In the GFC I changed the portfolio considerably by getting rid of the dividend cancellers and switching to some better prospects. Switching from DSGI to Diageo, for example. From Trinity Mirror to Pearson, and from Rentokil and Premier Foods to BATS, BLT and Unilever wereother switches.

Self preservation might be a better expression to use for corrective action. Currently I am doing nothing particular to my portfolio, except in respect of some corporate actions.

TJH

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Re: Strategies to deal with inflation

#390965

Postby hiriskpaul » February 28th, 2021, 7:58 pm

If you are concerned about inflation, think about reducing the BTL mortgages. High inflation, if it comes, will bring high mortgage rates with it and you need to be able to meet those mortgage payments if you are not to become a forced seller.

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Re: Strategies to deal with inflation

#390978

Postby 1nvest » February 28th, 2021, 9:40 pm

tjh290633 wrote:You may be interested in this table, which compares various indices, and my own portfolio, all unitised to be comparable, with the RPI since 1987:

.            Income Units              Accumulation                  April       
Year to Unit Value Div/Unit Unit Value FT30 FT100 RPI RPI
21-Apr-87 1.00 0.00 1.00 1.00 1.00 1.018 1.00
05-Apr-88 0.91 2.86 0.94 0.92 0.91 1.058 1.04
05-Apr-89 1.18 2.72 1.28 1.10 1.05 1.143 1.12
05-Apr-90 1.21 4.24 1.40 1.13 1.14 1.251 1.23
05-Apr-91 1.34 5.42 1.69 1.28 1.26 1.331 1.31
05-Apr-92 1.30 7.52 1.75 1.24 1.26 1.388 1.36
05-Apr-93 1.51 6.91 2.13 1.44 1.46 1.406 1.38
05-Apr-94 1.70 6.27 2.50 1.65 1.65 1.442 1.42
05-Apr-95 1.66 7.48 2.55 1.57 1.62 1.490 1.46
05-Apr-96 1.95 7.38 3.13 1.80 1.90 1.526 1.50
05-Apr-97 2.16 8.40 3.62 1.85 2.21 1.563 1.54
05-Apr-98 3.31 10.00 5.72 2.45 3.05 1.626 1.60
05-Apr-99 3.44 8.46 6.12 2.47 3.21 1.652 1.62
05-Apr-00 3.32 11.33 6.13 2.42 3.35 1.701 1.67
05-Apr-01 3.29 12.42 6.32 2.05 2.89 1.731 1.70
05-Apr-02 3.37 13.02 6.76 1.65 2.69 1.757 1.73
05-Apr-03 2.29 12.10 4.85 0.85 1.85 1.812 1.78
05-Apr-04 2.92 13.38 6.56 1.22 2.25 1.857 1.82
05-Apr-05 3.46 13.06 8.10 1.33 2.51 1.916 1.88
05-Apr-06 4.30 17.42 10.57 1.68 3.06 1.965 1.93
05-Apr-07 4.91 19.42 12.63 1.90 3.31 2.054 2.02
05-Apr-08 4.14 24.32 11.21 1.58 2.93 2.140 2.10
05-Apr-09 2.28 21.17 6.46 0.87 2.01 2.115 2.08
05-Apr-10 3.69 11.06 10.86 1.33 2.91 2.228 2.19
05-Apr-11 4.16 16.71 12.76 1.43 3.03 2.344 2.30
05-Apr-12 4.40 17.73 14.19 1.33 2.96 2.408 2.37
05-Apr-13 5.27 21.83 17.01 1.54 3.29 2.476 2.43
05-Apr-14 5.34 23.05 18.88 1.75 3.38 2.557 2.51
05-Apr-15 5.91 24.98 21.84 1.91 3.47 2.580 2.53
05-Apr-16 5.92 22.67 21.72 1.79 3.17 2.614 2.57
05-Apr-17 6.62 26.21 25.47 2.10 3.76 2.706 2.66
05-Apr-18 6.12 33.19 24.66 1.79 3.62 2.797 2.75
05-Apr-19 6.35 31.25 27.04 1.95 3.82 2.856 2.81
05-Apr-20 4.50 31.57 20.59 1.44 2.77 2.926 2.87
26-Feb-21 5.66 22.83 27.49 1.65 3.33 2.946 2.89

You will note that the FTSE100 has been comfortably ahead of the RPI for much of that time. Sometimes it falls back, but that effect is short-lived.

TJH

Nice rebound/recovery for your TJH HYP this fiscal year Terry.

Thanks for sharing, as I like to use your accumulation figures as a benchmark against a equal four way split of FT250, Berkshire Hathaway, gold and cash.

For those figures since 2016 I've assumed literal hard currency cash (0% returns)

Image
(Thumbnail image - click to view)

One surprise for me is how well your higher volatility has held up relative to a 4% SWR (4% of portfolio value removed at the start of the first year, with that amount uplifted by inflation as the amount drawn at the start of subsequent years). I had anticipated that higher volatility would have added a element of drag, but apparently not. Your Accum after SWR = 7.95% annualised nominal, versus 7.5% for the 4-way.

Just to highlight that the 4-way is calendar year values in contrast to your fiscal years (and as such the TJH Accum 2020/21 values are not yet a full year).

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Re: Strategies to deal with inflation

#391032

Postby Bubblesofearth » March 1st, 2021, 7:44 am

In a way dealing with inflation is not a potential new problem but one that has been ongoing since the GFC since when there has been, and continues to be, financial repression. The interest available on cash deposits has been below the inflation rate for well over 10 years and IMO this will continue regardless of what happens to that rate for some time to come. Very different to the days when you could keep your nose above inflation by simply leaving money in building societies or the distant memory of those nice NS&I linkers.

Long-term the best way to keep ahead of inflation is to buy assets tied to economic growth, i.e. equities and (especially in the UK) property. Gold should more or less match inflation. Cash and fixed interest will likely trail it (speaking from an expected return basis here not what some clever people might be able to conjure).

BoE

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Re: Strategies to deal with inflation

#391145

Postby 1nvest » March 1st, 2021, 1:35 pm

When you're accumulating/young and have time on your side inflation is a much milder risk than for those in retirement/drawdown.

Pretty much anything can be valued like a bond and when yields spike up, prices decline and vice-versa. High/rapid inflation will tend to see prices drop, but then the 'bond' will tend to pay out more in 'interest'. Over longer periods that washes, over shorter periods it can make a big difference. A relatively quick double up of prices/declines in yields followed by many years of low yields can compare in total return to the opposite (such as under large spikes in inflation) of a quick halving of prices followed by many years of higher yields.

Liability matching is a good inflation hedge. Own your own home for instance and 'rent' is liability matched, you're in effect both landlord and tenant such that it doesn't matter if rents soar or collapse. If you're still paying for a home then paying that off sooner or later is good practice, unless you can for instance be paying a very low interest rate and securing more elsewhere from the cash that you might otherwise have used to pay down the mortgage.

Once you own a home outright, and have savings in addition to that and retire, then inflation (sequence of returns risk) is a much greater risk. Over the last century for instance stocks total returns - with dividends reinvested, has seen values drop 75% in inflation adjusted terms over a ten year period. If money was also being drawn for retirement spending then that clearly failed after just 10 years or less. Solely relying upon that, even if your 'rent' is covered (you own your own home) isn't wise. Having pensions, ideally a state pension and occupational pension that is inflation adjusted considerably reduces the risk.

Failing that, then liability matching your spending for a decade will at least see you through that decade. Inflation bonds (index linked gilts) with £20K of inflation adjusted income for each of 10 years given current negative real yields may cost £220K (whatever, I haven't worked the figures) to buy £200K of inflation adjusted income (drawdown), but provides assurance of income stability. Surplus amounts to that can then be invested for growth purposes - that hopefully might grow sufficiently to restore former start date inflation adjusted portfolio value or more. Or vary the times/amounts according to your own circumstances. If you're 60 and just retiring with a 10K occupational pension, anticipate a further 10K/year state pension when you're 67, then 7 years of 10K in a 7 year inflation bond ladder covers having 20K/year spending available 'forever' (lifetime). At present levels that £70K of income might cost £80K/whatever but that might be considered as being a acceptable cost for the security. Owning a home that avoids having to find/pay 10K/year rent on top of that and that's a 30K/year net income type lifestyle, perhaps comparable to a 45K/year gross wage type lifestyle.

A sad element however is that the state has increasingly transferred risk away from itself and onto individuals. Fine if you work in the public sector that still has gold-plated pensions, dreadful for those in the private sector where collective cover of the likes of inflation linked pensions/healthcare etc. are being transferred over to individuals. Collective cover is by far the better, as the state can always print more money and/or adjusted taxes to match ongoing circumstances. For individuals with poor occupational pensions or that have to rely upon accumulated SIPP savings ..etc. to cover their own pensions and healthcare costs - the risks are very high. Rightfully IMO that should be corrected where there is no discrimination between public and private sector individuals.

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Re: Strategies to deal with inflation

#405953

Postby justfisk » April 21st, 2021, 8:48 pm

hiriskpaul wrote:If you are concerned about inflation, think about reducing the BTL mortgages. High inflation, if it comes, will bring high mortgage rates with it and you need to be able to meet those mortgage payments if you are not to become a forced seller.


High Inflation would also increase Rents.
Also if one can meet the payments, wouldn't inflation be good for debt as the Real value of the debt falls over time?


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