Protect savings from inflation

014london

As it seems we're in for a period of inflation, I'm looking to protect the value of my cash without taking unnecessary risks. I'm thinking of putting money into a stocks and shares ISA and then buying an inflation-linked tracker. In theory, this should maintain the value of my savings (minus the very modest fees, of course). But in practice, will it? Why don't we see this suggested by financial experts as a way to protect the value of savings? Am I missing something?

dunstonh

I'm thinking of putting money into a stocks and shares ISA and then buying an inflation-linked tracker.

That probably wont work.  a) its bad quality investing having all your risk based assets in one area and b) index linked gilts are not just about the yield but the unit price.

In theory, this should maintain the value of my savings (minus the very modest fees, of course). But in practice, will it?

No.

Why don't we see this suggested by financial experts as a way to protect the value of savings? 

Because an actual gilt and a gilt tracker are two different things.  However, even buying a gilt that is already issued would be unlikely to help due to its trading price.  If you were buying a new issue gilt then that is where you achieve your objective (or as close as).

masonic

Also asked by the OP and discussed here: https://forums.moneysavingexpert.com/discussion/comment/78527909/#Comment_78527909

014london said:

As it seems we're in for a period of inflation,

First things first, when did you start forecasting future inflation, and how successful have you been at it? As it seems the experts get it wrong more often than not (current HMT independent average forecasts are 2.9% for 2021, then 2.0% for 2022, which is within the range targeted by the MPC).

The sensible approach would be to accept that periods of high inflation are inevitable. High inflation has been predicted more or less constantly since 2009, at some point in the future someone's predictions will be right. If you try to take action to move in and out of investments when someone predicts high inflation, it will probably be costly for you. The answer is therefore to target a spread of investments that includes an element of inflation protection (but only at a reasonable price) at all times.

014london

dunstonh said:

I'm thinking of putting money into a stocks and shares ISA and then buying an inflation-linked tracker.

That probably wont work.  a) its bad quality investing having all your risk based assets in one area and b) index linked gilts are not just about the yield but the unit price.

In theory, this should maintain the value of my savings (minus the very modest fees, of course). But in practice, will it?

No.

Why don't we see this suggested by financial experts as a way to protect the value of savings? 

Because an actual gilt and a gilt tracker are two different things.  However, even buying a gilt that is already issued would be unlikely to help due to its trading price.  If you were buying a new issue gilt then that is where you achieve your objective (or as close as).

Thanks so much for your answer. This is just about what I do with cash savings and not a wider investment portfolio/strategy. I'll look into new issue gilts, but have a hunch they might be a bit too pro for me. Would my strategy get close to what I want to achieve if I bought a few different inflation-linked trackers? Would that reduce the risk regarding potential variations between yield and unit price? Or could it magnify them? Your thoughts would be appreciated.

tebbins

Inflation-linked gilts are volatile and with negative real yields are guaranteed to lose I think about 2% to inflation over the maturity of the bond, or the average maturity in the case of a fund or ETF such as INXG (put another way, you will *only* lose 2% in real terms).

The best asset class for inflation overall over the long term is stocks; and with high inflation, cyclical stocks specifically, which the FTSE 100/All Share is overweight in.

ColdIron

014london said:

I'm thinking of putting money into a stocks and shares ISA and then buying an inflation-linked tracker. In theory, this should maintain the value of my savings (minus the very modest fees, of course). But in practice, will it?

Probably not. Amongst a variety of other issues you will not be buying at par as Gilts are auctioned so you will be paying a higher price than you could redeem at maturity. Factor that in with the yield and custody/transaction fees and it isn't as rosy as it first appears

There is no easy way to beat inflation without taking on risk

masonic

tebbins said:

Inflation-linked gilts are volatile and with negative real yields are guaranteed to lose I think about 2% to inflation over the maturity of the bond, or the average maturity in the case of a fund or ETF such as INXG (put another way, you will *only* lose 2% in real terms).

The nominal YTM on index linked Gilts is about -2.5% and on conventional Gilts is about 0.7% (weighted average, short dated are much lower, long dated slightly higher). Index linked Gilts track RPI until the end of this decade, so using current figures (CPI=2.0; RPI=3.8%), the real return on Index Linked Gilts is -0.7% and on Gilts -1.3% ('active' cash in between). Can't predict what will happen in the future, but it has recently been better to hold linkers vs standard Gilts and cash (you'll see popular wealth preservation funds are loaded up with linkers). I agree that equities provide inflation protection, but if you are not 100% equities IL Gilts have a place.