Weathering the inflation storm – the importance of a well-balanced and diversified portfolio

Just as a sudden squall can blow a ship off course, inflation can rapidly alter the direction of your investments.

As the world recovers from the pandemic, markets have grappled with the new regime of higher inflation and interest rates after more than a decade of low, or near-zero rates. We find ourselves in anxious waters for markets and understanding the effects of persistent inflation is essential for making informed investment decisions.

Prolonged inflation erodes the purchasing power of money. As prices rise, the same amount of money buys fewer goods and services. This also has a direct impact on investment returns, particularly for assets like bonds. Considered a haven during economic uncertainties, persistent inflation and higher interest rates causes existing bond prices to fall. Should these need to be sold before maturity, investors could face capital losses. Diversifying bond exposure and holding shorter-duration bonds can help mitigate this risk.

While equities have historically outperformed other assets during inflationary periods, high inflation can also trigger market adjustments. With rising costs, companies may struggle to maintain profit margins, impacting valuations. During these times, we focus on quality: sectors and companies with pricing power, strong cash flows, and competitive advantages that can help them weather inflationary storms.

Tangible, real assets such as commodities and real estate can also perform well, acting as a hedge against rising prices, potentially preserving wealth, and providing an important element of diversification in portfolios to offset the effects of inflation.

However, as we’re seeing now, rising interest rates have led to higher mortgage rates, directly impacting property demand and affordability. Assessing global market forces, as well as local market dynamics is important to ensure the right kind of real assets are held. This also applies to diversifying into economies with lower inflation and interest rate regimes which further dampens the effect of prolonged inflation on your investments.

To navigate this inflationary storm, we believe a well-balanced and diversified portfolio positioned for a range of outcomes is essential. Mitigating risks shouldn’t be at the cost of potential opportunities and staying informed about economic trends, monitoring portfolio performance, and seeking advice from financial experts are essential steps in these uncertain times.

For bespoke financial planning and investment advice, please speak to a member of our financial planning team on 01223 233331.

Disclaimer

Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

The information in this article is not intended as an offer or solicitation to buy or sell securities or any other investment, nor does it constitute a personal recommendation.

The information contained within this blog is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.