Effects of inflation

mn1

I would be grateful if you could share your thoughts and opinions 
How should one prepare for inflation, with regards to investing ?
Inflation will reduce the true value of cash, so I thought I would buy shares 
Share prices seem to drop with rising inflation, since governments will probably raise interest rates to curb inflation
With rising interest rates cash value increases
I am not sure what would be best at this stage, hold on to cash or invest most of it before inflation starts eroding its true value ?
Forgive me as I am over simplifying this
I would be grateful for your comments 
Thanks 

JohnWinder

Well, you could go all out to invest with a view to maximising inflation protection, but it wouldn't give you the best protection against deflation, and it would likely not give the best return over a long-ish period. So one probably has to compromise by using a selection of investment securities which perform better or worse under different conditions eg inflation, deflation, changing interest rates, market cycles, and guided by the time frame of the investing. Unless it's inflation which is the only consideration, and then it's inflation linked government bonds in the absence of a better choice.

coastline

Markets have had good and bad periods looking at the 150 year history. Those four red lines represent periods where the markets struggled to outpace inflation.
EhCv7GqUwAACMF8 (900×504) (twimg.com)
This link shows the movements of bonds and equities over 120 years. From 1950-1970 rates increased but equities still managed gains. From that point inflation boomed and markets fell which coincided with the oil crisis in the early 70's.
Rates-Forward-Returns-042021.png (859×501) (realinvestmentadvice.com)
Equities and bonds have faired well recently.
Chart Tool | Trustnet
This link should go back to around 1985 ??. You can add various asset allocations as a guide but as ever there's no guarantees.
Chart Tool | Trustnet

eskbanker

mn1 said:

Inflation will reduce the true value of cash, so I thought I would buy shares

While your statement is likely to be true, the primary factors should be elsewhere in your financial circumstances, i.e. money that you're likely to need in the next few years should be in cash form, as should an emergency rainy day fund, but, once you've built up that protection, then investing is likely to be the most appropriate home for long term money.

The best vehicle will also depend on circumstances, e.g. whether it makes more sense to use pensions, or S&S ISAs, or a Lifetime ISA, and likewise the actual investments require careful thought, with individual shares rarely being a good idea for newbies, who are typically much better served by collective investments such as multi-asset funds, selected according to their risk tolerance.

Eco_Miser

Inflation reduces the purchasing power of money, whether the money is represented by cash or by 'investments'. The difference is that the compensation on cash (interest) is negligible at the moment; whereas the compensation on 'investments' tends to be greater than the loss to inflation, but is extremely variable, depending on what the investments are and on the sentiment of the market, and the political position.

Whether inflation is high or low, investments will usually do better than cash, but both lose value to inflation.

If you're willing to invest in a high inflation situation, why not invest in a low inflation situation?

tichtich

I don't think there are any safe options at the moment. You either risk gradual loss of capital through inflation or you risk sudden loss of capital through falling markets. One might say that those risks are always present to some degree. But I think they are particularly sharp at this time. 

Even index-linked bonds are not completely safe. As I understand it (and I'm happy to be corrected), individuals cannot buy new index-linked bonds, so you have to buy the bonds at market prices (probably in a bond fund), which can fall. That said, you would probably be safe enough if you bought long-term bonds and held them for the long term. But for the long term you would most likely be better off in equities.

As far as equities (shares) are concerned, prices are currently very high. Even if share prices don't fall, they offer poor rates of return on an investment at these prices. 

mrlegend123

as the US market is now over CAPE of 32 coupled with the threat of higher inflation. I have stopped investing and started to stockpile cash to take advantage of the soon to be price drops. 

Thrugelmir

Simple answer is maintain a diversified portfolio. Inflation is just one of many macro factors that will impact the markets in some way. None of which any of us have any control over. Time is best spent on managing the balance of your portfolio. 

mrlegend123

Thrugelmir said:

Simple answer is maintain a diversified portfolio. Inflation is just one of many macro factors that will impact the markets in some way. None of which any of us have any control over. Time is best spent on managing the balance of your portfolio. 

agree but we will see price drops in balanced funds 

Thrugelmir

mrlegend123 said:

Thrugelmir said:

Simple answer is maintain a diversified portfolio. Inflation is just one of many macro factors that will impact the markets in some way. None of which any of us have any control over. Time is best spent on managing the balance of your portfolio. 

agree but we will see price drops in balanced funds 

What often gets overlooked is the importance of the income generated and the reinvestment of same. 

Prism

mrlegend123 said:

Thrugelmir said:

Simple answer is maintain a diversified portfolio. Inflation is just one of many macro factors that will impact the markets in some way. None of which any of us have any control over. Time is best spent on managing the balance of your portfolio. 

agree but we will see price drops in balanced funds 

How do you know that. Nobody knows if inflation will surge or simply return to a steady increase. We don't when if or when the various central banks will rise interest rates to combat that. We don't know how various companies will respond with salary increases and price increases. We don't know how investors will react to all of those unknowns. 
Best to ignore the unpredictable and focus on what you can control.