Inflation across the globe has been surging for the last two years now. The British economy is witnessing an inflation rate of 7%, whereas that of the US stands at over 5%. The Bank of England has also predicted that UK’s inflation is swelling and can exceed 8% by the end of 2022. Managing one’s investment strategy becomes tough in times of rising prices.
Here are a few tips on how you can manage your investment strategy NOW –
1- Avoid hoarding cash and switch most of your savings to digital
Holding some of your cash income is okay for an emergency. However, most of your income should be held online in banks, where some of it is invested in return-providing assets. The maximum emergency fund you need to own as a rule of thumb is six months of your household’s net income. Anything beyond that does not need to exist in cash as that only decreases the value of your income over time as inflation increases.
2- Elevate your savings
An increase in inflation means a decrease in purchasing power due to everything becoming more and more expensive. This is why it is essential for you to inflate your savings as the prices inflate. Contributing more towards your savings and investments can help you decrease the risks associated with inflation in the long run. This is because even though you are saving more today, with the rising inflation, the net amount saved is only equal to what you used to save as prices are increasing as well, so you are also paying more than before.
In most cases, salaried employees benefit from increasing salaries as inflation shoots up, making it easier for you to save more and invest more. Increase the amount you are putting in your pension scheme to ensure a decent post-retirement lifestyle irrespective of the inflation rate.
3- Adjust your income methodology
By income methodology, we mean to say that you need to adjust your income strategy with respect to contributing towards your investments, pension funds and any other modes of schemes you are saving through for your future.
You can consider taking out less money than you do, cutting down on luxury expenses, focusing more on necessary expenses or delaying retirement to tweak your income strategy a little.
4- Increase your risk appetite
The ideal way to deal with inflation is to find out a way in which your income can grow as much or more than the inflation rate. One way of doing this is by increasing your risk appetite over time by increasing the risk exposure on your current investments. This means that you place higher bets on high return high-risk securities. This helps increase the potential for high investment growth but also increases your risk of losing everything.
Investing in high-risk equity mostly outperforms low-risk equities like fixed deposits in the long term. Even though it comes with its own share of fears, it is an excellent way to protect your income’s worth in the long haul. Understand the maximum amount you can risk or the maximum risk appetite you have, and balance your investments in a way that your income is protected whilst it is elevated. However, only take these decisions after consulting an expert financial adviser.
5- Finally, review your investment strategy from scratch
An investment strategy indeed made years ago can be unsuitable with changing times. That is why it is advised to review an investment strategy from time to time, especially during times of high economic volatility like rising inflation.
Particular investment options are better during rising inflation, and you may want to consider including those instruments in your investment portfolio for better returns. For example, right now, the most impacted sector due to the rising prices is the petroleum sector. You can consider adding petroleum-related companies in your equity portfolio to benefit from the increasing prices.
Including bonds is also a good practice to lock in some income through dividends as it helps your investment strategy to grow further.
Final words
Rising inflation will definitely impact one’s investment strategy if not reviewed and tweaked on time. The high inflation has been persisting for some time now and is expected to persist in the coming months as well. Hence, it only makes sense to review the investment strategy one has planned and change it according to the current economic times. Add the instruments better suited to high inflation and linked directly to the increasing prices to avoid the shrinking value of income and adverse post-retirement situations.
If you want to learn more about how to manage your investment strategy, request an introduction from us by clicking the button below.
