parts of Europe inflation is already approaching double figures. When inflation rises it reduces the real value of cash, meaning your spending power goes down. If you want to protect your savings from being eroded by rising inflation, there aren’t many options available to you. If you put your cash in a savings account you will be lucky to earn 1% interest, especially as the base rate is just 0.75% for now. One exception is app-only bank Chase which has launched a savings account paying 1.5%, though to qualify you must also open a Chase current account. If you put your money into 10-year UK government bonds, you could earn a yield of around 1.5% before tax. The yield is set by the market, and functions as the inverse of the bond price. If yields go up it is because the price of the bonds has gone down, which means your bonds are worth less than you paid for them. The first rule of making money is not to lose money. You can’t afford to lose capital if you want to protect yourself from inflation. In the past, gold has been a popular place for people to put money when inflation has taken off, but for small investors it isn’t straightforward, and in this cycle, gold hasn’t really lived up to its billing.
Also, gold doesn’t generate any income or pay any interest, so you are 100% reliant on the price going up and not losing any of your capital.
STOCKS ARE THE ANSWER When you buy a share in a company, you effectively get a ‘share’ of its earnings. Rather than the company dividing up any profit each year and sending a cheque to its investors, you make money if the value of your shares increase to reflect the company growing its earnings and/or from any dividend payments which it might choose to make. If you invest in a fund or investment trust, the same principles apply. They invest in companies or other assets like bonds. If the underlying value of their portfolio increases, so too should the value of the fund units or shares. And if the underlying portfolio generates an income for the fund or investment trust, they will typically pass on some or all that money as dividends to you.
HOW MUCH COULD I MAKE EACH YEAR? The Barclays Equity Gilt Study charts the annual ‘real’ returns of different UK assets over each decade, meaning they are adjusted for inflation.
Inflation adjusted investment returns (% per year) Period
UK shares
1920-1930 1930-1940
12.8% 4.0%
6.3%
1950-1960 1960-1970
3.3%
−4.1%
−0.6% 1.6%
−3.2%
1980-1990
11.7%
1990-2000
11.8%
2000-2010
−1.1%
−1.4%
0.4%
0.6%
2010-2020
2.9%
Average
6.4%
9.8% −1.2%
0.3% 12.1%
Cash 13.1%
2.3%
1940-1950
1970-1980
UK government bonds
−3.1% 6.0%
5.2% 9.4%
2.4% 3.8%
3.0%
4.2% 1.1% −2.2%
1.4%
Table: Shares Magazine • Source: Barclays Equity Gilt Study 2021
14 April 2022 | SHARES |
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