Inflation continues to be a worrisome buzzword in the world of finance. It’s not just because the cost of living is rising, but also because of the effect that it can have on the investments in your stocks and shares ISA. With the CPI rising to a 30-year high of 5.4%, it’s time to prepare your portfolio for potential turbulence.
To help you shield your wealth from the ugly tendrils of an inflationary atmosphere, I’m going to share four expert tips from Freetrade on how you can protect your money. Read on to find out how inflation affects investments and steps you can take to make sure your portfolio doesn’t get eaten away!
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How can inflation impact an investment ISA?
How inflation affects your investment will depend completely on what you’re investing in within your stocks and shares ISA. A financial climate with rising inflation figures will impact different investments in different ways.
For example, if you’re holding lots of tech stocks or shares trading at high growth multiples, you’ve probably noticed that they’ve taken a big hit lately. Whereas if you’re more interested in value investing, then you might have fared quite well.
What are some examples of inflation impacting ISA investments?
A clear example can be seen when comparing the S&P 500 index in the US to the FTSE 100 index in the UK:
- The S&P 500 has been performing extremely well over the last few years amid low inflation and low interest rates. But recently, it’s been dipping significantly because it contains a lot of growth-focused stocks.
- The FTSE 100 hasn’t had a particularly amazing few years against a backdrop of minimal inflation and low interest rates. However, now it’s starting to pick up and come into its own because there are plenty of shares that will be better suited to rising rates and inflation.
If you hold standard bonds or gilts, then inflation isn’t fun for returns. That’s because if you are promised a return of, say, 3% over a year but the level of inflation is 5%, then in real terms, you’ll lose money by locking your funds away.
How can you protect your ISA from rising inflation?
You’re not completely defenceless when it comes to protecting your portfolio! The good news is that there are some simple steps you can take to give yourself the best chance of coming out on top.
Dan Lane, senior analyst at Freetrade, shares his top tips for protecting the value of your stocks and shares ISA against inflation.
1. Think about your asset mix
Although inflation erodes the value of your money, it’s not a bad situation for all shares. Equities have performed decently under moderate inflation, but it could be worth mixing in some bonds. It’s possible to invest in inflation-linked bonds that will rise in line with figures.
2. Diversify – now!
Some stocks and shares do better than others when inflation is rampant. One important area to consider using as a hedge is the energy sector. There are some major oil and gas firms based in the UK, and you can buy shares in these companies that have historically provided healthy returns. It may also be worth looking into commodities, such as precious metals, and mining firms.
3. Consider REITs
Using a REIT (real estate investment trust), you can earn a percentage return on property and commercial real estate. Again, this type of investment has historically done well against the backdrop of inflation. And even with the move to online shopping, plenty of commercial warehouses are needed to store the plethora of goods we buy online.
4. Use pricing power
Aim to buy shares in companies that can control their prices. Pricing power means that these businesses have the ability to pass on rising costs to consumers. So, they can maintain the same profit margins even when costs are rising due to inflation.
Where can you make these changes to your ISA?
Having access to a wide choice of investments is vital if you want to take these steps and diversify your approach. It’s important to set yourself up with a top-rated stocks and shares ISA account that gives you access to every available option you need to protect against the effects of inflation.
It’s also worth double-checking that your stocks and shares ISA account has low fees. Otherwise, it could cost you to adjust your investing approach when buying or selling investments. High fees can also act as another form of danger, eroding your wealth over time.
Keep in mind that past performance doesn’t dictate future results. No one knows exactly how things will perform. So always do plenty of research and remember that even with lots of preparation, there are no guarantees with investing.