Thursday, 27 October 2011

Should investors stress about inflation?

Inflation is high, markets are erratic and the outlook very uncertain. Should you be bothered?.

I have been trying to catch up with the world following two weeks wandering about in the Scottish Highlands. Not much has changed.


We still do not know what the Eurozone mess is going to deliver, beyond, as everyone predicted, more grief for the UK economy. The best bet, made by a commentator yesterday on Bloomberg, is that we face a few more months lurching from one crisis to the next.


In the meantime, the Stock Market has been whizzing up and down like a fiddler’s elbow. How bad we feel about it depends, of course, on when we invested. I haven’t put new money in the market since investing my pension lump sum nine years ago, so my FTSE ‘marker’ is still 5000. I am unhappy. Anyone who invested at the top – approaching 7000 – is probably a good deal less happy. I take my hat off to those of you out there who bought gold at $300 an ounce and cashed in at $1,800. I bet that now you wish you’d bought more than two ounces.


We might believe that something is a surefire winner, and want to make a really decent bet. But when push comes to shove we have a fairly low tolerance for losses. So we make a small investment that does really well. Then we reflect that twice diddly squat isn’t much, so why didn’t we trust our judgement in the first place and boldly go for the much bigger gain?


Here is the rub for us mere mortals trying to make our life savings do something better than lying down passively while being ravished by inflation. We can do some sensible things, like making sure we use our ISA allowances, and filling our boots with NS&I Index Linked when they’re available. We can review our equity and bond funds at regular intervals and make sure we get out of the dogs. We can shop around for better interest rates on our cash reserves. We can shop at Lidl rather than Waitrose. We can turn the thermostat down and wear an extra vest. But to beat inflation we have to take some big risks, and most of us have trouble sleeping at night as it is.


So look on the bright side. You didn’t buy Japanese shares at their peak in 1989, so you haven’t lost 80% of that money. And you’re not overweight in US equities that are yielding about 2% and are clearly over-valued. The kids will just have to make do with what’s left, which may be less than they had hoped for. In the meantime, stay calm, and open a bottle.


On another note...


When NS&I call Premium Bonds an ‘investment’, I am reminded that my economics teacher told us that we should never lend money to the Government. But you can manage your Bonds on line, which is a boon. I suspect that there are lots of folk, like me, who sweep their current accounts on a regular basis and shift anything that isn’t needed right now into something that pays a bit of interest but doesn’t limit access.


The Premium Bond ‘fund’ is actually paying ‘interest’ at only 1.5%. But most instant access deposit accounts are paying 10 basis points (one tenth of one per cent, or 1p per annum per £10 held) on sums under around £10,000.


I’d much rather get a cheque for £25 now and again than a statement showing interest of two fifths of five eighths of very little, which sum is of course to be declared to Her Majesty’s Revenue. So I use Premium Bonds as my ‘sweep account’ and kid myself that I’m not lending money to the Government, merely having a little bet.

Read this article at http://www.candidmoney.com/articles/article248.aspx