IInterest rates have risen again this week, and many savers will see their rates rise accordingly, but rising inflation – currently at 9.4% and expected to rise – is eating away at the value of nest egg money people.
As central banks around the world raise interest rates to beat inflation, fears of a full-scale recession are growing. So what can you do now to protect yourself from a potential hammer blow to your finances?
Here we look at some of the options for protecting your nest egg and pension against inflation.
Stick it all in gold
They say gold is the traditional refuge against inflation – but that hasn’t been the case this time around. Since March, it has fallen from over $2,000 (£1,655) an ounce to around $1,750 and is back to where it was around two years ago. It did better in sterling because the dollar appreciated so much against the pound.
If you want to speculate in gold, you don’t have to buy krugerrands (South African gold coins). You can invest small amounts through “exchange-traded funds” – for example, Invesco Physical Gold, which holds the shiny objects in the vaults of JP Morgan bank in London.
Slip it under the mattress
It’s the dumbest thing you can do with your money. Firstly, if your house burns down or the money is stolen, a home insurance policy will usually only cover £500 or £1000.
Second, inflation means that the value of cash is constantly falling.
Put it all in a high interest savings account
It would only make sense if such a thing existed. On Thursday this week, the best rate on a one-year fixed-rate bond was 2.85% from OakNorth Bank. Even on a five-year bond, the best you could get was 3.4%. Meanwhile, many street banks are paying paltry sums into their Isa cash accounts.
That said, aim to keep a sum of money equal to three to four months of your expenses on deposit. It’s not easy, however, when so many families in the UK are facing what consumer champion Martin Lewis called a “national financial cataclysm”.
Buy the stocks that everyone has sold
Maybe. But never speculate this way if you can afford to lose the lot. US tech companies have been the most “beaten” stocks in recent months. PayPal fell from $285 a share a year ago to around $98 this week. Meta (Facebook) went from $370 to around $170, while Netflix went from $600 to around $225 this year alone.
But remember the old stock market adage, “Don’t catch a falling knife.” Just because a stock is down 50% in the past year doesn’t mean it can’t fall another 50% in the coming year.
Find a boring investment trust
Some investment trusts have histories dating back more than a century, holding an equity allocation in relatively low-risk companies with a good track record of regular dividends, even during recessions. Boredom is probably wise in these markets.
Dzmitry Lipski, head of fund research at the Interactive Investor website, says, “F&C Investment Trust is a good one-stop-shop for global investing, which hopes to increase its dividend again this year for the 52nd consecutive year. With confidence expecting inflation to remain elevated, companies that can keep increasing their dividends can provide an added level of comfort – and its 154-year-old track record means it’s had plenty of ups and downs. down.
Interactive Investor also likes Capital Gearing Trust and Personal Assets Trust.
Read our guide to investing online at theguardian.com/money/2020/sep/12/buy-shares-online-covid-19-rules.
Reduce your retirement
Even the lowliest employee with a small company pension has the right to transfer his money into his pension. But beware.
“A knee-jerk reaction to sell and go cash is not a good idea,” says Helen Morrissey, pensions expert at investment firm Hargreaves Lansdown. She adds that pensions are a long-term investment and if you hold too much cash, your pension could be eroded.
Despite sharp declines in share prices on Wall Street and across Europe, large pension funds have not performed so badly over the past year. The value of the default fund (retirement date 2040) of Nest (National Employment Savings Trust), which holds the pension savings of millions of newly registered UK workers, has actually increased over the past year, although only a few percent.
Go with smart money
Who was warning in May of last year of inflation, financial market overexuberance, and serious cryptocurrency risks? Warren Buffett, the legendary 91-year-old American investor. Since then, inflation has soared, the Nasdaq index of mostly tech stocks has fallen by around a fifth, and crypto has crashed.
Buffett says he is “fearful when others are greedy, and greedy when others are fearful.”
So what is he buying now? Oil companies. He has invested $27 billion in the shares of Occidental Petroleum and Chevron alone. It paid off: Occidental shares are up around 100% this year – not that anyone concerned about the climate emergency is likely to follow suit.
Buffett is also a big investor in Apple, whose share price has fallen nearly 10% this year. He continued to buy more Apple as its stock price slid.
Britain’s response to Buffett, Terry Smith, said in his letter to investors in July that he “is not optimistic” about the threat of continued interest rate hikes.
He says investors should stay focused on companies with consistently high profit margins. He adds that bonds are “definitely not the place to be in these conditions”, while real estate and real estate is “a notoriously local market with low liquidity and high trading costs”.
If you like Buffett’s sound, you can buy shares of his conglomerate, Berkshire Hathaway. Smith’s fund business is called Fundsmith.
Do nothing and sit
If you are under 50, this is not a bad strategy. When the markets fall, take comfort in knowing that your monthly pension contributions are buying more stocks (long term) than before.