How will inflation affect your investment choices?

Over many years, people often ask, “What can you advise me to buy to produce an income?” Having been trained in the UK and studying the extensive Chartered Insurance Institute exams, I have always been quite conservative in my answers.

Mainly, good old UK Equity Income Stocks, commonly held via a Mutual Fund or some form of income bond. Whilst they have never had superior performance, they always fell within my investment remit to clients, which was to produce a return somewhere between 4% to 8% depending on the tolerance to risk.

We must also remember that we have always been advising against banks or building societies, so their rate was low, and we get asked for something a little higher. It was never really asked if we could beat inflation, but now that word has crept back into people’s thoughts, they are listening to the news, reading reports of increases due to the supply and demand effect caused by Covid-19.

So, what has happened recently?

Well, the UK, in particular, has seen inflation rise to a ten year high this past week; see below to understand the rise in the last ten years.

Anyone now sitting with money in the bank on deposit or in a fixed rate bond with a building society is seriously losing the spending power they had a few years back in 2015.

So, what are the choices for you?

My first suggestion for producing income for yourself is to arrange a portfolio that uses UK Equity Income Funds to create an income stream. Then, depending on the risk you are willing to take, look at other areas, like Europe and Asia, where the returns can be as much as 7% to 9%.

We do not say for one minute that these will be the answer to everything; they do, of course, come with risk, as all investments do, no matter where they are held. Above, we spoke about savers now at risk of devaluing money just sitting in a bank; this is a risk.

However, the time has a way of reducing risk, and the longer-term goal can allow you to ride the waves of volatility, thereby using our phrase, it’s time in the market, not timing the market. But, oh dear, there I go using it again; I would like a pound for every time I have used that over the last 34 years of doing this job.

So always look at what risk you are prepared to take to try and achieve the extra gain you require; risk/reward comes with costs.

So why would UK Equity Income Portfolios work for you?

Not only do they offer dividend yield, but they also could provide an uplift in the share price and, therefore, the value of your original portfolio value. The combination makes them attractive for long term income and growth goals.

Even if you had managed just average performance from the Association of Investment Companies’ UK equity income sector, you would have reaped a total return of 41.5% over the past five years. Over the past decade, it would have been 140%.

This performance comes with some risk, which investing in shares always does. However, compare your return from a leading bank or building society and that 0.5% annual return looks very sorry for itself.
The stock market, or mutual fund portfolio investing, is not for everyone, so always know what you invest in, how much it costs, and the potential downside.

The benefit to many investors looking at what to do now is that the UK seems excellent value for money. With a lacklustre period since Brexit, many analysts are stating that good things are to come from the UK, good timing we think, if inflation is to be beaten, now it’s standing at 4.2%

The average return from an Equity Income Portfolio has been 3.7% over the last five years; taking covid into account, we are still slightly behind, so any recovery with UK companies distributing higher dividends will come as a comfort to any new investors.

The return varies from one fund to another in this sector, from 4.9% at the top to 1.9%. A combination will allow you to build both income and growth, for where we see larger income payments, there usually is minor growth upside, then vice versa for growth to income funds.

If the UK market is so unloved and the major fund management companies see some light at the end of the tunnel, what harm could this do to beating inflation? I don’t know about you, but investing in a bank knowing that all I will get in return is 0.5%, no thanks. I would much rather take a degree of risk and allow the UK major companies to derive that return for me.

Always take advice when looking to invest, speak with someone that comes recommended, and always know at the start what the charges are and what you will receive as part of the service.

We believe that this is what you should get from us, so we believe informed decisions are the best decisions.

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