Question
My Stocks and Shares Isa includes holdings of Corporate Bond,Strategic and Gilt Funds representing 25% of total portfolio.
I fear the effect of inflation on these investments. I am considering, index linked and/or Equity Income Funds as an alternative.
I am 72 years old. Please comment.Answer
Very sensible to be concerned about the impact of inflation - it's something too many savers and investors ignore.
Whether it's worthwhile adjusting your investments with a view to protecting them from high inflation obviously depends on where inflation goes in future - and this is currently very difficult to predict.
The biggest contributors to higher costs of living over the last 12 months have been transport (i.e. fuel prices) and food, with supply of the latter suffering from bad weather affecting crops. Fuel prices depend on global demand and while there's little doubt this will rise longer term, prices can be erratic shorter term as they're often driven by investors betting on where they think the price will be in future.
The other key factor that tends to drive rising prices across the board is when we all spend more. On the one hand low interest rates and governments pumping vast amounts of money into economies could lead to greater spending, but on the other higher tax and spending cuts might cause us to spend less.
Index-linked gilts benefit from both income and the redemption value increasing by inflation (measured by RPI). However, the price at which you buy them is affected by the market's inflationary expectations (unless buying at initial issue), so if the market's right your overall return will probably be similar to a conventional gilt.
What's important is to look at the breakeven average inflation rate where the return from an index-linked gilt to redemption equals that of a similar conventional gilt. For example, at the time of writing 2024 2.5% index-linked gilts have a breakeven inflation rate of 3.3%. If the market starts to believe that average inflation will be higher than this then the gilt's price will probably rise (by more than the standard inflationary link) and vice-versa if inflationary expectations shift downwards.
So consider index-linked gilts by all means, just be aware that if inflation ends up being lower than expected you might lose out.
Dividends generally have a good track record of rising faster than inflation, so equity income funds could make sense. The obvious risk is that if stockmarkets dive you'll probably lose money regardless of dividends - and losing money isn't a very helpful hedge against inflation.
Given it's nigh on impossible to successfully predict all these factors then hedging your bets makes sense and tweaking around a quarter of your portfolio doesn't sound unreasonable. Just beware that not all equity income funds are alike. If you're worried about possible stockmarket falls I'd be inclined to lean towards funds that focus on sectors like utilities, healthcare and tobacco - as these usually fare better during difficult times.
My Stocks and Shares Isa includes holdings of Corporate Bond,Strategic and Gilt Funds representing 25% of total portfolio.
I fear the effect of inflation on these investments. I am considering, index linked and/or Equity Income Funds as an alternative.
I am 72 years old. Please comment.Answer
Very sensible to be concerned about the impact of inflation - it's something too many savers and investors ignore.
Whether it's worthwhile adjusting your investments with a view to protecting them from high inflation obviously depends on where inflation goes in future - and this is currently very difficult to predict.
The biggest contributors to higher costs of living over the last 12 months have been transport (i.e. fuel prices) and food, with supply of the latter suffering from bad weather affecting crops. Fuel prices depend on global demand and while there's little doubt this will rise longer term, prices can be erratic shorter term as they're often driven by investors betting on where they think the price will be in future.
The other key factor that tends to drive rising prices across the board is when we all spend more. On the one hand low interest rates and governments pumping vast amounts of money into economies could lead to greater spending, but on the other higher tax and spending cuts might cause us to spend less.
Index-linked gilts benefit from both income and the redemption value increasing by inflation (measured by RPI). However, the price at which you buy them is affected by the market's inflationary expectations (unless buying at initial issue), so if the market's right your overall return will probably be similar to a conventional gilt.
What's important is to look at the breakeven average inflation rate where the return from an index-linked gilt to redemption equals that of a similar conventional gilt. For example, at the time of writing 2024 2.5% index-linked gilts have a breakeven inflation rate of 3.3%. If the market starts to believe that average inflation will be higher than this then the gilt's price will probably rise (by more than the standard inflationary link) and vice-versa if inflationary expectations shift downwards.
So consider index-linked gilts by all means, just be aware that if inflation ends up being lower than expected you might lose out.
Dividends generally have a good track record of rising faster than inflation, so equity income funds could make sense. The obvious risk is that if stockmarkets dive you'll probably lose money regardless of dividends - and losing money isn't a very helpful hedge against inflation.
Given it's nigh on impossible to successfully predict all these factors then hedging your bets makes sense and tweaking around a quarter of your portfolio doesn't sound unreasonable. Just beware that not all equity income funds are alike. If you're worried about possible stockmarket falls I'd be inclined to lean towards funds that focus on sectors like utilities, healthcare and tobacco - as these usually fare better during difficult times.
Read this Q and A at http://www.candidmoney.com/questions/question347.aspx
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