The Joys of Inflation...
Beyond The Credit Crunch
Since the global financial crisis (Credit Crunch) in 2008 / 2009, we’ve had a pretty easy ride.
Interest rates close to zero helped ease financial pressure on governments, banks and us households. It also helped stocks & shares (where a lot of your money’s invested). Inflation also remained VERY low.
What followed was a golden period for stocks & shares. Companies could borrow more cheaply and earn higher returns. Investing looked easy because everything delivered returns, regardless of how risky it was.
You’ll have seen this with your invested money (pensions, ISAs, investment bonds, etc). it’s all, pretty much, gone up, mor or less, in a straight line since the credit crunch.
I often think it’s quite surreal when the credit crunch was described by many as the end of capitalism as we know it. Within 18 months, markets were back to what they do best which is growing and making money!
But Inflation’s Back!
Since October 2020, a combination of factors has brought about some BIG changes to the inflationary landscape:
Rapid economic restart as COVID restrictions eased, prompting severe disruption to supply chains.
Post-COVID pent-up demand pushing up global energy prices.
Conflict in Ukraine and related sanctions affecting the supply of energy and key commodities.
The combined effect of these has led to widespread inflation across energy, raw materials and manufacturing costs.
Now, we’re all very worried about it. It seems to have just appeared, almost out of nowhere. Quite a shock considering it’s been hiding in the shadows for many years.
The Bank of England (what do they know we all say?!) feel inflation will start coming down (which has started) and could be back to around 2% in a couple of years.
The Importance of Staying Invested
In the annuls of history, the current high inflation figures will seem to be nothing more than a short-lived spike but it’s not easy to feel that way when you’re going through it!
The current slew of negative political and economic news understandably impacts risk appetite for investors but staying the course is important for 3 very good reasons:
Time in the market, not timing the market, delivers returns. Quite a catch saying but it’s true!
Compounded long-term returns tend to outweigh the losses prompted by periodic crises.
In the context of high inflation, cash is riskier than equities for capital preservation.
Trying to time the market to buy before 'good' days and sell before 'bad' days is impossible. Staying invested is critical to capture all the good days that drive returns, but inevitably that means accepting some bad ones too. While it can be uncomfortable, it’s better to stay invested.
Is Cash Risky?
Investment risk, often measured in volatility (ups and downs), is the flip side of returns. Holding money in cash and NOT investing might feel like the ‘safe’ thing to do.
In a benign market, when things are going well, volatility is your friend. You get a reward for the risk you take. But in a malign market, when things are getting difficult, volatility is your foe. You get a negative return for the risk taken.
Higher risk assets such as stocks & shares may appear volatile and will fluctuate, however, during an inflationary period, they’re safer than cash over the medium to long term.
By the same token, lower risk assets such as cash may appear safe and not fluctuate, but in an inflationary period cash is high-risk over the medium to long term as its purchasing power is destroyed by inflation.
Not Much of a Choice!
On the one hand, investing feels risky and is a world a lot of us don’t understand. On the other hand, doing nothing and keeping money in cash is GUARANTEEING a loss in the short-term.
Despite what financial advisers and market ‘experts’ like to tell you, there are NEVER guarantees when it comes to investing. Sure, there are some sensible things you can do to reduce the risk:
Spread your money far and wide (lots of eggs in lots of baskets).
Keep investment costs as low as possible.
Make sure the tax you pay is kept to a minimum.
But these only reduce the risk, they don’t get rid of it altogether. These are the dark days I’m afraid. They happen (regularly) and they’re scary. That said, it’s part and parcel of the investing journey.
I’m always on hand to reassure you. to remind you what the bigger picture is and to help you stay the course. In the long-run, it WILL be worth it!
That’s all for now, folks…