What to invest in to protect against inflation

Geography_rox

Hi all,

sorry if I am being thick, but if I currently have most of my savings in ETFs, what happens if heavy inflation kicks in? Will they hold their value or get inflated away? I have taken the view (possibly wrongly but its the one i’m going with) that we are on course for a no deal brexit, and I am thinking about how to protect my savings against the ensuing inflation. I thought I might move my money into a different currency over the next few months via revolut, but this would then obviously be sitting in cash. Basically I can’t get my head round say, if the pound halved in value (i know very unlikely, but easy maths!), all other factors ignored, would my ETF lose half its value or would it maintain the same value and be worth twice ad many pounds? 

many thanks!

Geography_rox

Equally, any other good investment options that would hold their value but also maybe make a little money in the next 6 months too would be very appreciated

Linton

Over the long term the only investment that has a very good chance of beating inflation is shares in companies, ie equity. The reason is that broadly the price a company can charge for its products will rise with inflation along with its costs and thus its profits and its share price. Plus as a shareholder you get  some benefit from those profits.

However share prices can be very volatile and so over the very short term you are as likely to lose as to gain. This means there is no safe way of protecting yourself against inflation over the short term.

It t is best for a small investor to hold shares in a wide range of companies through a fund. Such a fund could be an ETF, though ETFs are not usually recommended for novice investors.

But you talk about the £ losing value against other currencies, which is rather different to but may be the cause of UK inflation. In your equity fund you should be holding shares in companies from across the world. So if the £ loses value the price of foreign companies, or companies with major foreign business, should increase in £ terms. Though again in the short term those shares could well fall for other reasons, such as a major COVID resurgence in their home country.

EdGasketTheSecond

Gold has been a store of value for thousands of years. It is the asset class of choice in times of inflation.

bowlhead99

Geography_rox said:

Basically I can’t get my head round say, if the pound halved in value (i know very unlikely, but easy maths!), all other factors ignored, would my ETF lose half its value or would it maintain the same value and be worth twice ad many pounds? 

Imagine your ETF is tracking the value of companies on the US or global stock markets and it holds a Microsoft share which is currently worth $200.

If the exchange rate changes and 'all other factors' are ignored, the ETF still owns about $200-worth of Microsoft equity. However, as pounds will now buy only half as many dollars, dollars will now buy twice as many pounds, and when you sell the ETF and get the $200 out of it, you'd receive twice as many pounds as you would have received today. So it's good to hold international assets when the pound becomes weaker.

any other good investment options that would hold their value but also maybe make a little money in the next 6 months too would be very appreciated.

There aren't any investments that will definitely hold their value in pounds over the next six months. If you buy gold or equities they could drop. If you buy foreign assets and your guess that sterling will depreciate is incorrect, the value may drop even if the asset values don't. If you put your money in a UK government bond maturing in six months, or a sterling bank account, you won't make as much as a percent on your money in that time - and of course the real value could be inflated away if the price of goods and services goes up.

So, there's no guarantee. All you can do is spread your money around in different things from savings accounts or premium bonds in sterling (the interest may be less than inflation), to cash deposits in other currencies (the interest may be less than inflation and the currencies could devalue), to gold (not much help if it drops from £1400/oz to £1000) to bonds or bond funds (may yield higher interest rate than cash but capital value could drop in base currency or in pounds or both)  to equity funds (may return better than cash but capital value could drop in base currency or pounds or both).

If there was a 'standard' way to protect yourself against both sterling devaluation and inflation that would be guaranteed to work over short time periods, we would probably all be using it. Unless of course we thought that sterling might not devalue and could strengthen instead, or we were looking forward over longer time periods so didn't worry so much about the next six months.

Geography_rox

thanks very much for your very clear and thorough explanations. I will continue to hold my ETFs then (they are mostly europe ex-uk and asian). I have always planned to hold them for around 14 years (a lot is senior school fees savings for a baby!) so hopefully (optimistically?) the effects of covid on the market will be overcome by then. I’m fundamentally just much more pessimistic about the way the UK is being run at the moment and feel we are in for a big mess, much more so than the rest of the world. To be honest if I’m wrong I won’t be too upset about losing a bit in savings, I’d be happy we didn’t make a fist of the country and therefore my child’s future (luckily he has a European passport through his mother if things go really sour)!

dunstonh

EdGasketTheSecond said:

Gold has been a store of value for thousands of years. It is the asset class of choice in times of inflation.

Gold values go up and down like equities.   Gold is popular during periods of negativity and will rise in those times.  It will fall when there is positivity.    Gold is fear asset. 
Gold can fluctuate as sharply as equities.  And as it does not provide an income it can be dangerous for your finances to buy gold at a peak price.  For example, when gold peaked in the late 80s, it spent the next 20 years falling in value (inflation-adjusted) and did not recover that peak again until 2008.

If you ignore all other external factors then gold will rise with inflation but so will equities.    It is what it does net of inflation that matters.  The lack of income from gold is its Achilles heel during periods of economic growth.   Its status as a fear asset is the appeal during a negative period.

Voyager2002

In response to the opening question, it really does matter what your ETF holds. If you believe that Brexit is going to be bad for the UK economy, you would not want to buy an ETF investing in small-cap British companies (since most of their revenue comes from the British market). OTOH companies in Asia are unlikely to suffer much of an impact from any kind of Brexit.

I would also add that the main "common-sense" reason to expect a resurgence of inflation is the vast increase in public spending around the world in response to Covid-19, although expert bodies such as the IMF are not suggesting that this is an actual danger. As for the UK and Brexit turning out badly, that would also not necessarily lead to high inflation: it could lead to worse outcomes!

Anyway, I have been recently considering a similar question and my answer to it is given in the linked article. It discusses two investments, one of which was highlighted by Bowlhead on this forum but in response to a somewhat different question.

(If you do choose to invest in one of these, you need to read the Annual Reports to find out about a significant difference between them in exposure to vulnerable sectors of the UK economy.)
https://www.moneyobserver.com/family-fortunes-pull-rothschild-and-cayzer-family-controlled-trusts

Albermarle

(If you do choose to invest in one of these, you need to read the Annual Reports to find out about a significant difference between them in exposure to vulnerable sectors of the UK economy.)
https://www.moneyobserver.com/family-fortunes-pull-rothschild-and-cayzer-family-controlled-trusts

Both these trusts are supposed to be at least partly defensive investments but they have not done very well so far this year. Down 17% and 13 % respectively . 

I thought I might move my money into a different currency over the next few months via revolut, but this would then obviously be sitting in cash.

This would be pure currency speculation - best left to the City boys ( and girls ) !

bowlhead99

Albermarle said:

(If you do choose to invest in one of these, you need to read the Annual Reports to find out about a significant difference between them in exposure to vulnerable sectors of the UK economy.)
https://www.moneyobserver.com/family-fortunes-pull-rothschild-and-cayzer-family-controlled-trusts

Both these trusts are supposed to be at least partly defensive investments but they have not done very well so far this year. Down 17% and 13 % respectively . 

I thought I might move my money into a different currency over the next few months via revolut, but this would then obviously be sitting in cash.

This would be pure currency speculation - best left to the City boys ( and girls ) !

Partly defensive yes, but using plenty of equities and not necessarily in the types of equities or bonds that held up the best in the particular type of market conditions we went through in the first half of this year.  CLDN has a high proportion of its assets in illiquid, infrequently-valued private equity holdings and so like many private equity investment trusts is typically on a discount to NAV. In recent times (prior to Covid) RCP was on a premium due to people liking its 'partly defensive' positioning. So year to date, despite CLDN having quite a bit of exposure to assets whose valuations had a rough time, its share price has held up better than RCP as RCP moved from premium to discount while CLDN was already on a discount. 

There are quite a few things to consider when looking at ITs as investment vehicles - although discount/ premium is not the most important factor for a long term hold (though discount is preferred if possible), it can make a difference to outcome, particularly as sentiment shifts.

Neither of them would be particularly appropriate if the goal was, as per the OP, "hold their value but also maybe make a little money in the next 6 months too", because the decent long term returns they have offered is best measured in decades rather than month-by-month or six-monthly performance snapshots.

Voyager2002

bowlhead99 said:

Neither of them would be particularly appropriate if the goal was, as per the OP, "hold their value but also maybe make a little money in the next 6 months too", because the decent long term returns they have offered is best measured in decades rather than month-by-month or six-monthly performance snapshots.

In a later post the OP clarified that the time-frame for his investment is 14 years, to finance senior school for a baby. I think his concern about what he expects to happen around the end of the year is a bit of a red herring.