Looking for comment on protecting against inflation

[Clariman]

Our investments are split: property 43%, cash 42%, equities 15%. We are risk averse, so our objective is to maintain our investment value, ideally with some growth. We accept that we have lost growth opportunity by being so cautious. However, with inflation now at significant levels again, our large cash element will lose value pretty quickly, so need to consider what to do with it. About 65% of it is in cash-ISAs, the rest in bonds with a little easy access. The equities are all in either index trackers or funds, all within ISAs.

Our life stage is that we retired in our 50s and both have final salary pensions which are mostly index-linked - and we are now taking them. State pensions are a few years away but we live comfortably now on pension, some very part time earning and property income.

So my broad question is where would you go to protect our investment value rather than to grow it? We could convert the cash into a property from which we could get income and hopefully growth but that would require maintenance and management. I'm not adverse to that but house prices have risen quite a lot recently. Presumably we can still transfer-in cash-ISA money into equity ISAs?

Thanks
Clariman

[richfool]

Our investments are split: property 43%, cash 42%, equities 15%. We are risk averse, so our objective is to maintain our investment value, ideally with some growth. We accept that we have lost growth opportunity by being so cautious. However, with inflation now at significant levels again, our large cash element will lose value pretty quickly, so need to consider what to do with it. About 65% of it is in cash-ISAs, the rest in bonds with a little easy access. The equities are all in either index trackers or funds, all within ISAs.

Our life stage is that we retired in our 50s and both have final salary pensions which are mostly index-linked - and we are now taking them. State pensions are a few years away but we live comfortably now on pension, some very part time earning and property income.

So my broad question is where would you go to protect our investment value rather than to grow it? We could convert the cash into a property from which we could get income and hopefully growth but that would require maintenance and management. I'm not adverse to that but house prices have risen quite a lot recently. Presumably we can still transfer-in cash-ISA money into equity ISAs?

Thanks
Clariman

Noting that you have a reasonably high percentage in property already (perhaps that is your own residential or buy to let properties), I would suggest opting for defensive investment trusts like Ruffer (RICA ) Personal Assets (PNL) and Capital Gearing trust (CGT).

If I wanted to be a little more adventurous then I would include some REIT's (commercial property companies), though not if the 43% property you refer to in your OP includes REIT's or commercial property. Commodities are suited to inflationary environments but are however more cyclical and volatile.

My holdings, of that defensive nature, include: PNL, RICA, MATE and several REIT's (including PHP).

[mc2fool]

Presumably we can still transfer-in cash-ISA money into equity ISAs?

Yes, the only rule of note is that you can only transfer the whole of the current years subscription; for previous years you can do a partial transfer. Your cash ISA provider may have additional restrictions, see their T&Cs.

[Hariseldon58]

The suggestion of using the wealth preservation Investment Trusts, Personal Assets,Capital Gearing Trust and Ruffer has merit.

I would comment on the risk aversion, certainty is NOT security. You are certain of negative returns but this is not long term security.

You could take a leaf of of the investment policies of the wealth preservation trusts, invest in something like Vanguard Life Strategy 80 and iShares ITPS (US Treasury Protected Securities) in a 2:1 ratio.

Be aware that REITs are equities and often contain leverage, not just a property play…

[absolutezero]

https://www.lemonfool.co.uk/viewtopic.php?f=8&t=33812
https://www.lemonfool.co.uk/viewtopic.php?f=8&t=33748
Two discussions you may find of interest.

[Clariman]

https://www.lemonfool.co.uk/viewtopic.php?f=8&t=33812
https://www.lemonfool.co.uk/viewtopic.php?f=8&t=33748
Two discussions you may find of interest.

Many thanks. I did have a quick read of them before posting but thought the personal situation background that i provided would be useful.

[scrumpyjack]

Our investments are split: property 43%, cash 42%, equities 15%. We are risk averse, so our objective is to maintain our investment value, ideally with some growth. We accept that we have lost growth opportunity by being so cautious. However, with inflation now at significant levels again, our large cash element will lose value pretty quickly, so need to consider what to do with it. About 65% of it is in cash-ISAs, the rest in bonds with a little easy access. The equities are all in either index trackers or funds, all within ISAs.

Our life stage is that we retired in our 50s and both have final salary pensions which are mostly index-linked - and we are now taking them. State pensions are a few years away but we live comfortably now on pension, some very part time earning and property income.

So my broad question is where would you go to protect our investment value rather than to grow it? We could convert the cash into a property from which we could get income and hopefully growth but that would require maintenance and management. I'm not adverse to that but house prices have risen quite a lot recently. Presumably we can still transfer-in cash-ISA money into equity ISAs?

Thanks
Clariman

Risk is a personal perception thing to some extent and historically, and IMO in future, cash is very risky. It is not risky for a matter of days or weeks but over the long term it is. The pound of my youth has lost about 97% of its purchasing power, ie you need 100p now to buy what 3p would buy then!
OTOH it is difficult and rash for anyone else to advise you what to do, because if it goes wrong…. So you need to make your own decisions but do bear in mind that if you expect to live for a decade or 2 longer, cash has very significant risks.
Personally, in your situation, I would go for the wealth preservation investment trusts. I would not go for more property – your exposure to that is large enough already and it is a bubble that can burst as it has occasionally in the past. It is also very illiquid so you might not be able to realise it when you need to, and if you need to get at it, you have to sell all or nothing. Also it has little spread of risk – we are talking about one property in one location – that is a great concentration of risk.

[Clariman]

The defensive investment trusts sound like the right sort of thing for us. How do I go about choosing them? And do I buy them directly or via an intermediary?

Our current equities are all ISAs.

L&G index trackers, bought direct but now via Fidelity
An index tracker and a LS80 via Hargreaves Lansdown
An index tracker and a LS60 via iWeb share dealing

Is there any benefit in moving these all to one intermediary?

Thanks
C

[mc2fool]

The defensive investment trusts sound like the right sort of thing for us. How do I go about choosing them? And do I buy them directly or via an intermediary?

Don't choose, buy all three in equal measures. They're all traded on the London Stock Exchange so you can just buy them, in real time (during LSE opening hours), in one (or more) of your ISAs.

Our current equities are all ISAs.

L&G index trackers, bought direct but now via Fidelity
An index tracker and a LS80 via Hargreaves Lansdown
An index tracker and a LS60 via iWeb share dealing

Is there any benefit in moving these all to one intermediary?

Thanks
C

Compare running costs in all three. IWeb it's simple, it's zero. HL for LS80 is expensive as it's a fund and they'll be charging you 0.45%pa for holding it with them.

Which "index trackers" are you holding, and with which broker? There can be a big cost difference (esp. with HL) between tracker funds and tracker ETFs.

[Hariseldon58]

The defensive investment trusts sound like the right sort of thing for us. How do I go about choosing them? And do I buy them directly or via an intermediary?

Our current equities are all ISAs.

L&G index trackers, bought direct but now via Fidelity
An index tracker and a LS80 via Hargreaves Lansdown
An index tracker and a LS60 via iWeb share dealing

Is there any benefit in moving these all to one intermediary?

Thanks
C

One broker is fine if your joint assets are ’say’ £500,000 or less, HL are fine for investment trusts, ETFs and shares but expensive for funds like Vanguard LS80. iWeb is a good low cost choice, I doubt if you would come to any harm if you consolidated your holdings to iWeb.

[scotview]

So my broad question is where would you go to protect our investment value rather than to grow it?
Clariman

Well, from my experience of the reaction of gold & silver to the recent impact of Plague, Inflation and near WWIII, my feeling is that gold and silver have lost it as a historic store of value. Best avoided I think, just my personal view.

[richfool]

The defensive investment trusts sound like the right sort of thing for us. How do I go about choosing them? And do I buy them directly or via an intermediary?

Our current equities are all ISAs.

L&G index trackers, bought direct but now via Fidelity
An index tracker and a LS80 via Hargreaves Lansdown
An index tracker and a LS60 via iWeb share dealing

Is there any benefit in moving these all to one intermediary?

Thanks
C

Buy them within your equity ISA's, whichever investment manager offers the best/lowest costs. The tickers are as mentioned in my earlier post: PNL.L and RICA.L and CGT.L They are tradeable with live prices.

[dealtn]

We are risk averse, so our objective is to maintain our investment value ... However, with inflation now at significant levels again, our large cash element will lose value pretty quickly, so need to consider what to do with it.

So my broad question is where would you go to protect our investment value rather than to grow it?

Unfortunately there is no safe option that will protect your (real) investment value. You would either have to accept a fall in value due to inflation, or attempt to grow it to at least maintain that real value, but open yourself to risk, about which you are averse.

Although you ask what I would do, our profiles are sufficiently far apart for you not to do what I would. By way of suggestion though I note you have an inflation linked income stream already, so better placed than most. As such which is the lessor evil, a shrinking real cash value, or the risk of capital losses (over which timeframe) from straying from cash? Were it the former I would suggest leaving it in cash and enjoying the rising pension income as part compensation.

[scrumpyjack]

We are risk averse, so our objective is to maintain our investment value ... However, with inflation now at significant levels again, our large cash element will lose value pretty quickly, so need to consider what to do with it.

So my broad question is where would you go to protect our investment value rather than to grow it?

Unfortunately there is no safe option that will protect your (real) investment value. You would either have to accept a fall in value due to inflation, or attempt to grow it to at least maintain that real value, but open yourself to risk, about which you are averse.

Although you ask what I would do, our profiles are sufficiently far apart for you not to do what I would. By way of suggestion though I note you have an inflation linked income stream already, so better placed than most. As such which is the lessor evil, a shrinking real cash value, or the risk of capital losses (over which timeframe) from straying from cash? Were it the former I would suggest leaving it in cash and enjoying the rising pension income as part compensation.

That somehow implies that losing purchasing power due to inflation is not a 'risk'. The only point of assets is the ability to buy things so purchasing power is what matters. Holding cash over an extended period is extremely risky, as the fact I pointed out earlier that it takes 100p now to buy what 3p bought when I was young. Implying that somehow maintaining nominal value means absence of risk is IMO a big mistake that financial advisers have peddled for decades. Everything is risky, you just have to be aware of that! (apart from the inflation linked income which isn't the issue the OP asked about)

[vand]

42% cash is way too high even if inflation is 0%, never mind 6%...

In terms of a passive strategy, there is no easy answer to what you should do. That is why inflation is such a big problem for investors.

We've already have several threads about what people are doing.

IMO the best thing you can do is massively diversify into something resembling a risk parity or all-weather portfolio. You may still lose, but you will lose a lot less than if you remain in cash indefinitely, or if you have concentrated portfolios that don't work out.

You definitely want some exposure to real assets. I don't care what else is in your portfolio - if you only hold financial assets (stocks/bonds/cash) it is not a properly diversified portfolio.

[dealtn]

We are risk averse, so our objective is to maintain our investment value ... However, with inflation now at significant levels again, our large cash element will lose value pretty quickly, so need to consider what to do with it.

So my broad question is where would you go to protect our investment value rather than to grow it?

Unfortunately there is no safe option that will protect your (real) investment value. You would either have to accept a fall in value due to inflation, or attempt to grow it to at least maintain that real value, but open yourself to risk, about which you are averse.

Although you ask what I would do, our profiles are sufficiently far apart for you not to do what I would. By way of suggestion though I note you have an inflation linked income stream already, so better placed than most. As such which is the lessor evil, a shrinking real cash value, or the risk of capital losses (over which timeframe) from straying from cash? Were it the former I would suggest leaving it in cash and enjoying the rising pension income as part compensation.

That somehow implies that losing purchasing power due to inflation is not a 'risk'. The only point of assets is the ability to buy things so purchasing power is what matters. Holding cash over an extended period is extremely risky, as the fact I pointed out earlier that it takes 100p now to buy what 3p bought when I was young. Implying that somehow maintaining nominal value means absence of risk is IMO a big mistake that financial advisers have peddled for decades. Everything is risky, you just have to be aware of that! (apart from the inflation linked income which isn't the issue the OP asked about)

Not to me, but maybe I should have been explicit about the riskiness of the fall in real value (and income and purchasing power) being unknown in size. There is no free lunch here, so both have risk attached. I sense, perhaps incorrectly, the investment risk to capital is more important to that through inflation to the OP - I will leave that for him to comment should he choose. The presence of an inflation linked income stream mitigates a meaningful element of the inflation risk I would think, but far from completely. An investor without that, with risk aversion, is presented with an even greater dilemma.

[Itsallaguess]

I sense, perhaps incorrectly, the investment risk to capital is more important to that through inflation to the OP

I think it's interesting that the focus of the opening post is primarily about how to protect the situation 'from here' going forwards, and the thread has quite rightly covered some of the risk-related aspects about that 'current situation', but given that this is the 'Investment Strategies' board, I think it's also worth highlighting that the OP might now *also* be paying the price for being too risk-averse and cash-heavy during a multi-year period where some more worthwhile equity-related gains could well have softened the blow a little, in terms of the inflation-based risks we all must face from this point onwards....

A classic 'I wouldn't start from there' situation then, and an indication that, looking backwards, there was a clear risk in not taking on a little more risk during those fruitful years for equities...

Cheers,

Itsallaguess

[Clariman]

I think it's interesting that the focus of the opening post is primarily about how to protect the situation 'from here' going forwards, and the thread has quite rightly covered some of the risk-related aspects about that 'current situation', but given that this is the 'Investment Strategies' board, I think it's also worth highlighting that the OP might now *also* be paying the price for being too risk-averse and cash-heavy during a multi-year period where some more worthwhile equity-related gains could well have softened the blow a little, in terms of the inflation-based risks we all must face from this point onwards....

A classic 'I wouldn't start from there' situation then, and an indication that, looking backwards, there was a clear risk in not taking on a little more risk during those fruitful years for equities

I don't disagree with your observation but I'd make two comments. Firstly, I am looking ahead to decide what actions to take now in order to protect what we have. Even if I wanted to, I cannot change the past.

Secondly I have no regrets about our past decisions. Perhaps I am unusual, but I'm not motivated to maximise my wealth to the nth degree. The most important objective for us has always been to be financially secure and lead a comfortable life. I have no desire for expensive watches, a Porsche, designer clothing and other trappings of 'wealth'. We have always lived below our means and that is why we have constantly grown what we have and continue to do in retirement.

There are 2 broad ways of growing one's wealth. One is to live well within one's means and save, and the other is to invest for growth. Obviously combining the two will get the greatest wealth but we did well enough with the former, while taking minimal risk.

BTW I know that many people need to invest for their pensions to have enough for a comfortable life, so I am not criticising others for their motivations and decisions. I'm just explaining our motivations because I think some posters are shocked at our lack of investing ambition and our risk averse nature.

C

[Wuffle]

5 year charts are everywhere, seemingly the industry standard.
I find it useful to type, for instance, 'CGT share price' into Google which brings up a chart and go to 'more' above the chart then 'max' for a really long term view.
That long term view for the wealth preserver ITs would seem relevant to this enquiry as to their suitability compared to cash over the longer term.

W.

[Gan020]

Our investments are split: property 43%, cash 42%, equities 15%. We are risk averse, so our objective is to maintain our investment value, ideally with some growth. We accept that we have lost growth opportunity by being so cautious. However, with inflation now at significant levels again, our large cash element will lose value pretty quickly, so need to consider what to do with it. About 65% of it is in cash-ISAs, the rest in bonds with a little easy access. The equities are all in either index trackers or funds, all within ISAs.

Clariman

So, you are very risk adverse. I follow your view. I have retired early in my 50's and have enough money to live happily ever after. Or rather I have enough money if they value of my investments does not fall 30% in the next few years. Later on in life it wouldn't matter so much due to compounding.

My biggest concern about some of the advice is the assumption that the stock market is too high and that bonds would compensate in a equity downturn. I'm not sure that rule follows any longer because of QE leading to an asset bubble both in equities and bonds.

There are an increasing number of posters asking on LF for advice on what to do with their cash because of their concerns about it being eroded away in real terms. I am concerned there may be no answer and to buy now is to buy near the top of the bubble.

Equities may fall.
Bond yields may rise and thus the capital value of bond funds may fall at the same time.

Cash may after all give the best return. I note 2.4% is now availalbe on a 5 year FSCS protected bond or 2.11% on a 2 year deal.
Chase bank have lauched an easy access account paying 1.5%

(note - the markets are now predicted 7 interest rate rises in the US by the end of the year and then another 2 by around March 23 and thereafter stopping). I think the markets are getting ahead of themselves and theoretically the price of equities and bonds should have adjusted to reflect that but imho only some of the adjustment has taken place)