Don’t let caution get the better of you.
“A ship is safe in harbour, but that is not what ships are for”
Until relatively recently, inflation wasn’t a serious concern. The UK hadn’t seen persistent price rises since the 1970s. Today, there are reasons to be more concerned. Supply shortages and bottlenecks, higher energy costs, increases in wages to attract staff in sectors finding it difficult to recruit and the government unwinding covid support schemes are pushing up prices. While central banks continue to suggest that the rises are “transitory”, many economists are assuming inflation will settle at a higher level than it has over the past few decades.
When inflation rises quickly, the Bank of England will tackle it by raising interest rates. They work on the principle that when borrowing is more expensive, people will have less to spend, and prices will go down in response. However, if inflation is caused by external forces – such as the global squeeze on energy prices, then raising interest rates may not solve the problem.
This may be an issue for investors. Even if inflation stays in line with the Bank of England’s targets, long-term investors need their savings to grow by around 2% a year just to ensure it maintains its purchasing power.
The most important rule for any long-term investor is to avoid “reckless caution”. Investors often don’t recognise that there is a risk associated with keeping their long-term savings in cash because their capital value stays the same, but their buying power will be progressively less and less. One of fm’s 7 principles of investing is – don’t just invest in cash. Every investor does need emergency funds but for longer term investment plans, other asset classes will offer better prospects for capital growth and potentially beat the perils of inflation.
By Philip Harper | June 2022
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