Inflation is a nasty parasite. It eats away at the real value of money people have worked hard for over the course of years or even decades. That is one reason I am focussed on ways I can aim to protect capital from the ravages of inflation.
Private and commercial banking firm Arbuthnot Latham has issued a helpful handful of tips on how people can try to protect capital in uncertain times. A couple of those caught my eye as they are moves I am already making when it comes to my own portfolio.
Diversification
One of those moves is diversification. In other words, not putting all of one’s eggs in one basket as an investor.
Arbuthnot Latham point out that, “by investing in a mixed asset portfolio, you have exposure to underlying investments which react differently to external factors”.
I try to follow that approach myself. I also think it can be helpful to diversify even within a single asset class when I try to protect capital.
Defensive or not?
For example, I own a number of tobacco shares like Altria and British American Tobacco. This business sector is often seen as defensive. In other words, because customers tend to buy tobacco products even when the economy is in a bad condition, revenues and profits at such firms will hopefully hold up alright. That could explain why British American shares are up 32% over the past year.
Then again, no share is free of risk. One risk to tobacco shares is the decline in cigarette use in developed markets like the US. Tobacco companies have tried to manage that by developing non-cigarette businesses. But Altria further wrote down the value of its investment in vaping brand Juul this year.
The Altria share price is 9% lower than a year ago. Even a supposedly defensive sector like tobacco can see falling share prices in a weakening economy. That is why I diversify my stock portfolio to make sure that it covers a broad range of business areas.
Tax efficiency
Another of the ways to try and protect capital identified by Arbuthnot Latham is to invest in tax-efficient ways.
That will mean different things to different people. But for me, investing in a Stocks and Shares ISA is one way I try to manage my investments in a tax-efficient way.
That means that I am able to try and target both dividends and capital growth, while hopefully reducing the tax impact that might otherwise result from those investments if I made them outside the ISA.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Why protect capital?
The value of money in real terms is not constant.
Currently, high inflation is eating away at it day by day. That is true for uninvested cash sitting in my ISA. But it also affects the value of my dividends. Last month, for example, Jupiter paid me an interim dividend of 7.9p for each share I own in the asset manager. That is the same amount as last year’s interim dividend – but 7.9p today is not worth as much in purchasing power terms as it was a year ago.
That is why I am looking for ways to try and protect capital in my investments. Hopefully, putting them into action will help my finances at a time of high inflation.
