What approach to take if I believe...

lonibra

I hope this is not a stupid question.
All my investments are in BTL property and Vanguard stock market index funds (ISA and pension). I don't actively manage it or anything, just put in money every month.

Based on what I see in the sector that I do business in, I believe (I might be wrong!) that we have already entered a period of severe labour scarcity and that this will at some point result in significant and sustained inflation over the coming years. 

I fully understand that I might be wrong but just wanted to know from an investment perspective what I could do different (if anything) to hedge against this possibility?

dunstonh

All my investments are in BTL property and Vanguard stock market index funds (ISA and pension). I don't actively manage it or anything, just put in money every month.

If you are using index funds then you should have some degree of management in respect of the ratios you put into each fund and how often you rebalance it.

Based on what I see in the sector that I do business in, I believe (I might be wrong!) that we have already entered a period of severe labour scarcity and that this will at some point result in significant and sustained inflation over the coming years. 

Not just that.   Inflation is expected anyway as it was the method used by the  US and UK as a way to reduce the real terms debt value the last time public sector borrowing was this high (in real terms).

I fully understand that I might be wrong but just wanted to know from an investment perspective what I could do different (if anything) to hedge against this possibility?

Equities in industries that continue to thrive regardless of the rate of inflation.  But that is a managed decision and not really in keeping with a passive strategy.

lonibra

Thanks both. It is Vanguard equity index trackers, no bonds.

kidmugsy

I'm considering investing in an ETF of TIPS, the US equivalent of index-linked gilts.  Last time I looked their "real" yield was higher than ILGs but they do track the wrong inflation index. I thought I'd allow for that by refraining from hedging into GBP.  I don't know whether this idea is a sensible diversification. My guess is that it is.

We already own gold in the form of ETFs.  I understand that equities are not good protection against inflation while it's happening but do tend to compensate you afterwards.  So if your investment horizon is long, equities may do OK.  It's a separate issue that equities, especially in the US, look awfully high.

Younger people in the family ask me my opinion of BTL.  I simply say we never did it though we did once have a good chance to.  Were we wrong?  Not if we didn't fancy the hassle and worry - we were correct to avoid it.  In hindsight, though, it might  have made us richer.  But like many another investment it hasn't really made you richer until you sell it.  How can one "time" that?  

Maybe BTLs represent the past.  What represents the future?  Please don't say "Tesla".

lonibra

Even though I missed the get-rich years of BTL, it's actually been decent going so far. I keep it steady at 70-75% LTV so the nightmare that keeps me up is a significant jump in interest rates! 

MaxiRobriguez

Previous winners (or, least worst options) in higher inflation scenarios are:
- Property
- Consumer staples
- Banks

If you already have a decent BTL proportion then you might consider yourself already in a good place to combat inflation risk.

lonibra

MaxiRobriguez said:

Previous winners (or, least worst options) in higher inflation scenarios are:
- Property
- Consumer staples
- Banks

If you already have a decent BTL proportion then you might consider yourself already in a good place to combat inflation risk.

Even property that is highly-leveraged?

kuratowski

Highly-leveraged means high borrowing - and inflation reduces the value of debt, so that's good for you (the borrower), in real terms your debt will cost less to service and repay.  But then of course, higher leverage also means higher risk.

MaxiRobriguez

lonibra said:

MaxiRobriguez said:

Previous winners (or, least worst options) in higher inflation scenarios are:
- Property
- Consumer staples
- Banks

If you already have a decent BTL proportion then you might consider yourself already in a good place to combat inflation risk.

Even property that is highly-leveraged?

In terms of cash flow it will depend on your ability to pass on any interest rate rises to your renters I guess.

Actual capital preservation then a BTL portfolio is about as good as it gets historically.

Notepad_Phil

kuratowski said:

Highly-leveraged means high borrowing - and inflation reduces the value of debt, so that's good for you (the borrower), in real terms your debt will cost less to service and repay.  But then of course, higher leverage also means higher risk.

That's okay if you've got a long term interest rate fix but there could be problems if interest rates have to rise and people are on variable or short term fixes at close to bank rate.

kuratowski

Yes, the higher risk of higher leverage has two legs - lower income and/or higher expense (interest rates) - what matters is the cover.  Although of course the changes to tax rules have skewed the balance a bit.