Asset Management and Inflation
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In times of high inflation, individuals who live on a fixed income (which is the majority of us) are generally the ones who come off the worst. As prices increase, they are no longer able to buy as much as they previously could. Creditors with contracts, such as banks, which offer fixed interest rates also suffer when it comes to increasing inflation. For example, if a bank issued a loan a loan with a fixed annual interest rate of 8% at a time when inflation stood at 5%. This means the banks actual rate of return would have been just 3% once the inflation is deducted. If inflation increased to 10% during the following year, the actual rate of return for the banks would be -2% meaning the banks have made a loss. On the other hand, if you're not the bank but the one on the receiving end of the loan, this increase in inflation allows you to pay your fixed debt payments at a lower amount which in turn would mean you could pay the debt off at a quicker rate than you previously had been able to.
Investing in shares is one way that investors choose to combat this effect of inflation on their savings. If the company your are investing in is run by competent individuals who are able to recognise the effect inflation is having on their operations and increase prices in conjunction with the increases in their costs, the revenues and profits that they earn will increase alongside inflation. It is this thinking that contributes to inflation but it is also that which provides you with the protection from the effects of inflation. Obviously it is important to try and invest in companies that have returns that are higher than the inflation rate and it’s important to include the dividends when assessing whether a particular investment will provide you with enough protection.
You can also invest in inflation protected investments like inflation indexed bonds and Treasury Inflation Protected Securities (TIPS) for US investors but UK investors still have very little options when it comes to guaranteed, inflation-proof investment options. An investment portfolio with fixed income securities that are not protected against inflation will see a deterioration of value. If your portfolio has fixed income securities that aren't inflation protected and you expect higher inflation in the future, it would be a good idea to think about moving your money out of these fixed income securities. If this is something you are concerned about it is important that you discuss this with your asset management company or even just a financial advisor who could discuss some options with you.
In a high inflationary environment, investors look more for investments with a short-term maturity horizon. Investors tend to shy away from investments with long-term maturities due to the increased uncertainty. Because inflation makes it difficult to predict future expectations, investors are unwilling to enter into long-term contracts. Over time this unwillingness has a negative affect on economic growth.
Investing in shares is one way that investors choose to combat this effect of inflation on their savings. If the company your are investing in is run by competent individuals who are able to recognise the effect inflation is having on their operations and increase prices in conjunction with the increases in their costs, the revenues and profits that they earn will increase alongside inflation. It is this thinking that contributes to inflation but it is also that which provides you with the protection from the effects of inflation. Obviously it is important to try and invest in companies that have returns that are higher than the inflation rate and it’s important to include the dividends when assessing whether a particular investment will provide you with enough protection.
You can also invest in inflation protected investments like inflation indexed bonds and Treasury Inflation Protected Securities (TIPS) for US investors but UK investors still have very little options when it comes to guaranteed, inflation-proof investment options. An investment portfolio with fixed income securities that are not protected against inflation will see a deterioration of value. If your portfolio has fixed income securities that aren't inflation protected and you expect higher inflation in the future, it would be a good idea to think about moving your money out of these fixed income securities. If this is something you are concerned about it is important that you discuss this with your asset management company or even just a financial advisor who could discuss some options with you.
In a high inflationary environment, investors look more for investments with a short-term maturity horizon. Investors tend to shy away from investments with long-term maturities due to the increased uncertainty. Because inflation makes it difficult to predict future expectations, investors are unwilling to enter into long-term contracts. Over time this unwillingness has a negative affect on economic growth.
