Rising inflation: why a long-term investment strategy could be the answer
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
Inflation continues to stand at a high rate in June 2023 (7.9%). Whilst this is lower than the previous 8.7% figure, the cost of living continues to put pressure on household finances across the nation – leading to higher prices at the supermarket, petrol stations and retail outlets.
Moreover, inflation is also creating challenges for savers. Although interest rates are at their highest point in many years (6% in some cases), inflation continues to ride above these rates – eroding many of the “real returns” from new savings accounts.
This is where a long-term investment strategy can be very helpful. Not only could the returns potentially be higher compared to cash savings, but a strong portfolio has a better chance of matching – even beating – inflation in the long run.
Below, our Grantham-based financial planners here at Castlegate explain how a long-term investment strategy can add value to households in 2023, even as living costs continue to rise.
If you want to discuss your financial plan with a financial adviser, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
Growing your net worth
During “hard times” in the economy (i.e. rising inflation), it is easy to focus on short-term financial goals, living month-to-month. Whilst a budget is important for financial stability and discipline, it does not guarantee that your net worth will rise over the years.
By raising your net worth – that is, growing your assets versus your liabilities – you open up additional financial options for yourself in the future.
Here, we are not just referring to increasing your income (although that is important), but also to the rising value of assets such as property, shares and other items that could produce an income or capital gain.
Whilst cash can be a useful store of value to help with short-term goals (e.g. tiding you over during an emergency – such as losing your job), it is generally not a good “vehicle” for increasing your net worth. This is because savings rates rarely beat inflation.
For instance, suppose your savings account offers a 4% interest rate but inflation averages at 5% over the coming years. Whilst your bank statement might show some attractive returns from the interest you generated, the money would be losing 1% in “real value” each year.
By contrast, an investment strategy could achieve higher returns in the long run – surpassing those offered by cash. Equities, in particular, can offer more growth potential.
For instance, over the last 30 years, the S&P 500 has averaged a return of about 7.5%. Over the last two decades, moreover, the average yearly return of the FTSE 100 has been 6.89%.
The power of tax-efficient investing
A long-term investment strategy becomes even more promising in light of various tax-efficient “vehicles” that can be used to boost investors’ chances of beating inflation.
In particular, pensions can be very powerful due to the tax relief mechanism. In 2023-24, a UK taxpayer can contribute up to £60,000 per year into his/her pensions (or up to 100% of earnings – whichever is lower) and receive tax relief equivalent to their highest marginal rate.
For instance, if someone pays only the basic rate of income tax, they can get 20% tax relief. This means it only “costs” them 80p to put £1 into their pension. For an individual on the higher rate, however, up to 40% relief can be claimed – meaning the contribution “cost” is only 60p.
When you factor in employer pension contributions, the real returns can be boosted even further. Under auto enrolment rules, an employer must contribute at least 3% to an employee’s pension and the latter must put in 5%.
Some employers will be even more generous than this and others will even match employee contributions up to a certain point (e.g. 10%) – providing, in effect, a 100% return before any investment performance is even factored in.
Cash savings struggle to match these kinds of generous schemes. A notable exception might be the lifetime ISA, which allows the saver to claim a 25% “boost” from the government on what they put into the account (up to £1,000 per tax year).
Be careful with short-term thinking
We understand that rising living costs can create enormous pressure for people to prioritise immediate income and outgoings. However, there are many dangers associated with merely looking at the short-term view.
These include following trends and selling investments too early (e.g. underperforming assets which could recover and grow if left alone). Another risk is that savers try to “time the market” using trading strategies – an approach which often runs aground.
Successful investing requires patience, discipline and a wise strategy which involves diversifying across a wide range of assets, markets and opportunities. By sticking to the plan agreed with your financial adviser, you have a better chance of beating inflation and achieving the long-term goals that you agreed on together.
Conclusion & invitation
If you are interested in discussing your own financial plan or pension strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
