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Patience and focus: 3 top tips for investing to beat inflation

Category: News

With bank savings rates rising, you might be tempted to move some of your investments back into cash. But while inflation remains high, you could find that your savings are losing value in real terms.

You’ll also need to factor in the potential opportunity cost of missed investment returns.

Keep reading to find out about three key factors to consider now, before you invest.

Inflation is falling more slowly than expected while high street banks have been slow to pass on improved rates

Since its 41-year peak of 11.1% back in October 2022, UK inflation has been falling.

The latest figures from the Office for National Statistics (ONS) confirm that the Consumer Prices Index (CPI) for the 12 months to August 2023 dropped by 0.1% from the previous month to 6.7%.

This isn’t as sharp a decline as the Bank of England (BoE) had hoped, forcing them to adjust their inflation forecast. The BoE now expects inflation to fall back to its 2% target between April and June 2025 – rather than late 2024, as initially hoped.

As part of its efforts to tame inflation, the BoE’s Monetary Policy Committee (MPC) has been raising the base rate since December 2021. From just 0.1%, it currently stands at 5.25% with a knock-on for high street cash savings rates.

Moneyfacts (as of 26 September 2023) confirms the best easy access cash savings rate is currently 5.1%, which is below current inflation. This means that your cash holdings are effectively losing value in real terms.

Investment could hold the key to higher returns but, as we know, that comes with added risk.

1. Understand your risk profile and be prepared to invest for the long term

Your invested funds will rise and fall daily with changes to the stock market so it’s vital you understand your attitude to risk from the outset.

Short-term market volatility could see the value of your fund drop. This is why we only ever recommend investing for the long-term – because it gives you plenty of time to recover from any losses.

To successfully manage risk and reward in your investments, you’ll need to know the answers to some fundamental questions:

  • What am I investing for?
  • How far away is this goal?
  • How important is it to me?

In truth, none of these questions should be approached individually. They are all linked.

Putting money aside for your child’s education might have a shorter timescale than saving for your retirement. Knowing that your invested funds could help your child through higher education might make you more risk-averse. Where your own money, for your retirement several decades away, is concerned, you might be able to take a higher level of risk.

Your capacity for loss is also important. We can help you to look closely at your current financial situation and then test this against different scenarios, helping you to manage your level of risk accordingly.

2. A diversified portfolio is the best way to spread risk and reach your goal

We’ve likely said it before, but a successful investment is not one that gives you the highest returns in the shortest possible time. Instead, it allows you to reach your goal, in your agreed timeframes, with the smallest amount of risk.

This is where diversification comes in.

Your investment portfolio will include a mixture of different asset classes, from low-risk bonds and gilts to higher-risk stocks and shares. You’ll also find that your money is invested across different sectors and in different parts of the world.

This spreads risk because if one specific area performs badly, the loss will hopefully be balanced out by better performance elsewhere.

Diversification gives you the chance to see inflation-beating returns, even if certain areas of the markets are performing poorly.

3. Long-term investments offer the chance for inflation-beating returns so be sure to stay focused

Market volatility caused by global events like the coronavirus pandemic or Russia’s invasion of Ukraine can affect stock markets.

As an investor, it’s understandable that these drops might make you nervous.

But succumbing to emotional, knee-jerk decision-making could have long-term consequences. For this reason, remaining focused on your long-term goals is key.

By taking your money out of your investments when times are tough, you are effectively turning a paper loss into a real one. At the same time, you’re lowering the value of your investment which stands to benefit when markets recover.

Remember that your investment is long-term exactly to ride out these trickier moments. Once you understand your risk profile and goal and have a plan in place, the plan only needs to change if your goals do.

Get in touch

With cash savings rates rising, you might be tempted to ditch investments in favour of cash, but this could have huge long-term consequences.

Your investments offer the chance of inflation-beating returns so speak to us now if you have any questions at all about your long-term plans.

Get in touch with our team of professional and expert financial planners by emailing or calling 03452 100 100.

Please note

The value of investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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