Inflation is defined as “a general increase in prices that reduces the purchasing power of money”. This means that as inflation rises, the purchasing power of your hard-earned cash will decrease. For a moment imagine that you are back in 2010 with £100. If you consider that average inflation between then and now has been 2.7% per annum, then today’s equivalent would be £131.13. That means that £100 worth of goods in 2010 would cost £131.13 today.
The further you go back, the more startling the figures get. For example, £100 worth of goods in 1970 would cost £1,581.94 today. Head back another generation to 1920 and that £100 would be the equivalent of £4,570.75 today. You get the idea!
Inflation can have a very real impact on our future buying power and quality of life. Although it might seem a good idea to safely tuck away your savings as cash deposits, doing this over the long term could seriously erode the purchasing power of your savings, particularly with interest rates remaining at historically low levels. While it is important to have a rainy-day fund for when things go wrong, or savings for holidays, weddings, and other significant costs, it is a good idea to place any excess cash over and above these needs somewhere that will work much harder for you.
What are the alternatives?
Investing is a great way to mitigate the risk of inflation. While of course there are different risks associated with investing, you are practically guaranteed financial loss in real terms when you rely solely on cash saving, and by diversifying your investments along with a long-term approach, you can dramatically tilt the odds in your favour.
Equities, bonds, and other readily tradable asset classes provide a wealth of other benefits. Not only do they offer an element of inflation protection, but they can also reward holders with a regular income by way of dividends or interest payments.
Buying and selling such investments is remarkably simple, particularly when compared with investments into other relatively illiquid asset classes such as property, which can take months (even years!) to complete, whereas a shareholding can be purchased or disposed of within seconds and settled within days.
Whilst there are costs involved with investing, we would argue that the initial and ongoing charges associated with stock market investing are often less than that of property investing. In addition, the tax rules surrounding second homes and buy to let property are much more penal than they used to be. Capital gains tax rates, for example, are higher than those applied to stock market investments. Careful use of ISA, pension and CGT allowances can help stock market investors considerably reduce their tax bills.
Perhaps the most overlooked, but most satisfying, benefit of investing in these types of securities is being part of something special. As an investor in equities, and a provider of capital, you can play a role in the growth of the world’s most exciting companies and gain exposure to the technologies and services they provide.
Cave & Sons
If you would like to start investing, or simply have more questions on the subject, do not hesitate to get in touch with us. Cave & Sons are an independent wealth management firm based in Northampton. We offer a wide range of financial services, including investment management, stockbroking, and bespoke financial planning. Our team can be reached on 01604 621421, or you can enquire through our online contact form.
Cave & Sons Ltd is authorised and regulated by the Financial Conduct Authority (FCA), Financial Services Register number 143715.
This communication is for general information only and is not intended to be individual investment advice or tax advice. The views expressed in this article are those of Cave & Sons and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. You are recommended to seek professional regulated advice before taking any action.
Key Risks: Past performance is not a guide to future performance. The value of an investment and the income generated from it can go down as well as up, and is not guaranteed, therefore you may not get back the amount originally invested. Investment markets and conditions can change rapidly.