It’s a topsy-turvy world out there right now, and it can be hard to know which route to take when investing. Nothing is guaranteed, but right now we have what you could call a sketched outline of our immediate economic landscape.
In order to combat rising levels of inflation and low interest rates, I’m going to be taking certain steps to protect my portfolio. Read on if you’d like to hear my plan for making the most out of the current climate.
How inflation and low interest rates can impact your investing strategy
Inflation has become a dirty buzzword lately. But it’s just a part of the economy we have to deal with.
Personally, I see rising inflation as a challenge to overcome. It’s a moving target that I won’t hit if I’m not on top of things. The fact that my money is losing value by the day serves as a good kick up the backside and motivates me to aim for the best returns possible – without getting wild or reckless of course.
Low interest rates from even the best savings accounts mean I will not be stockpiling my money. You don’t want to watch your savings deteriorate as they get nibbled away at by the inflation rats. I like to give inanimate concepts more of a fleshy title so they feel more real!
What I’m doing to beat inflation when investing
Sadly, inflation means that any gains made with investments are worth less in real terms. However, smaller gains are still better than no gains at all. Here’s what I’m doing to beat inflation with my investments:
- Avoiding low-interest bonds that lock away my money for long periods of time
- Being relatively aggressive with my equity allocation into stocks and shares
- Using investment trusts with strong track records to zero in on the best companies and exciting private opportunities across different themes and sectors
- Investing consistently and not trying to time the market
- Only holding small amounts of cash
Why I’m investing this way
I have the bulk of my portfolio in a developed-world ESG fund. This gives me exposure to lots of different companies, industries, and countries. When there’s inflation, there will still be lots of companies making buckets of profit. A diversified fund gives me some exposure to them whilst limiting my concentration risk.
I also have a small percentage tucked away in an emerging markets ESG fund that will hopefully do well as economies recover. These funds are all held in a stocks and shares ISA account to make sure I don’t pay any tax on gains.
Aside from these broad funds, I’m still buying shares in certain growth stocks. But mostly, I’m using investment trusts that focus on technology and environmental innovation.
Many tech firms have had amazing performances recently but I believe there’s a lot of froth and overvalued stocks. Rather than actively managing everything myself, I trust the expert management of my chosen investment trusts to cut down positions of overblown stock and let the shares with the best prospects ride.
Why I’m investing and not holding lots of cash
There’s a lot of fear that we could be due a big market crash or correction. This may be the case, but who knows when it may come? The value of the market could grow another 10%, 20% or 30% before it happens.
One thing that is certain and measurable is inflation. Prices are rising and my cash is worth less on a daily basis. So, as I have no mortgage or ongoing cost commitments, I’m only keeping an emergency fund right now of £1,000.
Anything over that, I’m looking to put to use. This will mostly be through investing in shares that should grow decently over the next decade. I don’t really care too much about the short-term and I’m also not looking to get outrageous returns either. I think a lot of investors have been spoilt by performances since the coronavirus pandemic and it creates unrealistic expectations.
Where future investment opportunities can be found
Ben Kumar, senior investment strategist with 7IM believes there’s plenty of opportunity for investors over the coming years.
Here’s where he believes you can capitalise on potential growth: “We are tilted away from the winners of the last cycle, such as mega-cap tech, and towards the winners of the next one. This includes looking at undervalued sectors and regions, such as industrials, mid-caps and emerging markets.
“There is also a greater focus on cyclical, smaller businesses, spread out across the world, rather than just in the US, as well as longer-term thematic investments into healthcare companies and businesses looking to tackle climate change, rather than the mega-cap tech media platforms.”
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About the author
George is a writer and qualified financial adviser focused on educating others in personal finance & investing.
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