Four ways to protect your money from inflation

Darius McDermott 12/04/2016 in Multi-Asset

Put simply, inflation is when prices rise and things cost more than they used to. If your savings don’t keep pace with inflation (for example, if they are in an account with an interest rate return that is lower than the rate of inflation), your money will buy less over time, effectively decreasing in value.

Here are four different ways to combat inflation and seven funds that could do the job for you.

1) Pick the right asset class

Real assets, like gold and property, as well as their related shares, generally do well in periods of higher inflation. Gold, especially, is commonly used but hard for small investors to hold in any form other than jewellery. So a fund like Merian Gold & Silver is worthy of consideration.

When it comes to property it’s an imperfect, but partial, hedge: many rents in Europe are index-linked and in the UK rent reviews are upward only while any wage inflation could make increases possible. I like BMO European real Estate Securities.

2) Be specific

There are some companies that do better than others in inflationary environments. Cash generation provides a buffer for a company, enabling it to self-fund its operations through tougher times. And pricing power is particularly important, as the company will be better able to offset rising costs by passing them on to customers.

Evenlode Income invests in some such companies. Infrastructure is also a good bet, as many of these assets have prices linked to inflation. You could consider First State Global Listed Infrastructure.

3) Avoid bonds

Inflation is also usually the enemy of bonds. Because the income paid by bonds is usually fixed at the time they are issued, high or rising inflation can be a problem, as it erodes the real return you receive.

To mitigate this risk you could invest in a strategic bond fund like Invesco Monthly Income Plus, that has the flexibility to invest anywhere in the fixed income market and aims to provide a high income.

4) Let the professionals take the lead

If you’d prefer to leave the decisions up to a professional investor, you could consider a multi-asset fund and let the fund manager adjust the asset allocation to deal with issues such as inflation when they occur. Funds such as Jupiter Merlin Balanced and Premier Multi-Asset Growth & Income are two such examples.

This article was first written in April 2016 and updated in May 2020

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