When you reach the saving stage, your first thought may be to preserve the real value of your capital. This is most likely to happen when you're downsizing after a lifetime of investing, but it could also happen when you reach your first £10,000 or £100,000 of savings.
The inflation attack on consumers has begun to ease. Some commentators, such as consultancy Oxford Economics, believe UK inflation is returning to its 2 per cent target. The Bank of England has recently made some optimistic comments, although it said it could not rule out another global shock that would keep inflation high. Even if it disappears in the short term, there is always concern that it may return – even if the low levels are a concern for retirees.
Investing in stocks is a good protection against inflation when you are accumulating money. This is because listed companies that make or do things can adjust the prices of their goods or services to match inflation.
But once you have income from investments, you may need a fresh perspective.
Wealth managers typically advise retirees to “de-risk” their investments by reducing their levels of exposure to stocks. This ensures that the value of your investments does not fluctuate as much as it did while you accumulated them.
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It can be difficult to offset sharp declines when withdrawing regular income from an investment. But if the stock market crashes at the beginning of your divestment, it could have a devastating impact on your long-term income.
Most de-risking involves some exposure to gold, simply because the price of gold does not always move in the same direction as stock prices. However, on Wednesday, the price of gold reached a record high of $2,295 per ounce. I think this is a “klaxon” signal that it's time to examine the reasons for his contract.
“There have been a host of reasons why gold prices have been at an all-time high, however, they almost all come down to the fact that gold is a stable investment,” says Rick Kanda, managing director at Gold Bullion Company. “Gold has historically been viewed as a reliable store of value during economic and political uncertainty, making it unsurprising that a record number of investors will back gold in 2023.”
Gold is protection against war or economic crisis. But some investors also hold gold as a way to protect against inflation. This seems debatable.
For one thing, Schroders looked at data from March 1973 to December 2022 and found that on average, over 12 months, gold returned 21 per cent above the inflation rate during times of high and rising inflation.
However, Laith Khalaf, head of investment analysis at AJ Bell, says: “Gold has spent long periods in recession, whether moving sideways or downwards, and it is very volatile, so I think the argument that it is an effective hedge against inflation is quite weak.” “
An alternative for investors who want to take risk out of stocks but also build in inflation protection is index-linked bonds. Backed by the UK government, these assets will provide inflation protection if you hold them to maturity, and you can get a positive real return – which doesn't always happen, but it does today.
“In the current market, you can get index-linked bonds with a yield between 0 percent and 1 percent above the inflation rate, depending on the maturity date,” Khalaf says.
These “links” may also complement your gold holdings. Sam Benstead, deputy editor of investment groups at investment platform Interactive Investor, thinks about the difference this way: “In general, gold can be viewed as a defense against very high inflation (or hyperinflation); and inflation-linked bonds are a defense against persistently higher-than-expected inflation.” , as long as bonds offer a positive real return when purchased and as long as investors are concerned about the risk of bond prices moving up and down.
Ideally, you build a ladder using individual British links that mature at intervals. But investors who don't have advisors to do this for them may not have the time or inclination. Despite varying efforts by platforms to explain and define index links, many find it surprisingly difficult.
Meanwhile, although you can easily add gold to your portfolio by purchasing an exchange-traded product, such as iShares Physical Gold ETC Acc (recommended by four investment platforms: AJ Bell, Interactive Investor, Fidelity, and Charles Stanley Direct), However, be careful about gold. Exchange-traded products featuring UK index links.
The index-linked negative government bond index has a very long average maturity, mainly because the issuance was designed to meet the needs of pension funds, which have long-term liabilities. Nearly 50 percent of the iShares Index Linked Gilts ETF is bonds with a maturity of more than 15 years.
But ETFs with large proportions of long-term bonds can be volatile when prices fluctuate. For example, from December 1, 2021 to September 27, 2022, the iShares Index Linked Gilts Ucits ETF fell 50 percent.
“This was the period when markets began to price in inflation and rising interest rates, causing the value of index-linked bonds to fall even as inflation rose,” Bensted explains. “While your coupons would have risen, the capital value of your index-linked bonds would have collapsed.”
To find shorter average maturity of passive index based products in the UK, you can broaden your search to include active management and global link funds. Fidelity included the Royal London Short Duration Global Index Linked Fund M Inc in its “Select 50” list of recommended investments, saying: “Loans are made over short terms (typically less than five years) and this also helps reduce the risk of the fund. It has shown The manager is skilled at managing the strategy and the fairly low cost reduces the impact on the modest expected gains.
However, with only 30 per cent exposure to UK links, this fund may not be what you need if you are worried about UK RPI inflation.
Again, you need to be careful, as some actively managed index-linked UK government funds have significant exposure to long durations as well, and come with higher expenses than trackers.
Enter the relatively new CG UK index-linked bond fund with costs of 0.15 per cent – an actively managed fund that is close to the price of a passive fund. With 14 UK indices links in the portfolio and an average duration of 5.5 years, it looks promising.
It launched in October 2023, but its managers are experienced in this area – the multi-asset fund they also manage, the Capital Gearing Portfolio Fund, aims to protect clients' capital and has significant exposure to index links while holding 1 per cent in gold. .
“If you discount the price of gold over the past four decades, it hasn't maintained its value in real terms,” says Emma Moriarty, investment director at CG Asset Management. “Where gold adds value is in an apocalypse scenario – that's why we hold 1 per cent.”
You may feel that planning for the end of the world requires a higher level of gold. But planning for inflation gives a reason to leverage a little of your gold gains for the benefit of links.
Moira O'Neill is a freelance finance and investing writer. She does not have any of the money mentioned. X: @MoiraONEill, Instagram @MoiraOnMoney, Email: moira.o'neill@ft.com
