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In Britain, in recent years, inflation has been relatively low, but this may not continue, and the effects can quickly mount up. If you put your money in a bank for a few years, it will lose much of its value unless bank interest rates are as high as inflation. At the moment, a good savings account pays about half the rate of inflation, so putting your money in the bank is not the safe option: it’s the guaranteed loss option! What can a smart investor do to stop the value of their hard-earned savings falling?
Index-linked bonds are mainly issued by the Government, which promises to provide a return on the original cost greater than inflation. The problem is that you generally buy them ‘second-hand’, possibly at a much higher price than the original one. The amounts the Government pays stay the same, meaning that the investment return you get will be lower, and you won’t be fully protected against inflation. A few large companies also issue index-linked bonds, but the same issues apply.
This may bring visions of Johnny Depp and a treasure chest full of doubloons, but investing in real assets like gold can provide protection against high levels of inflation. This has not proven reliable in the past, however, so you might not want to buy that gold bar just yet!
Another kind of ‘real’ investment is property or land. You can invest in companies that buy and sell property, or you can invest directly in property. UK property prices do generally increase at a rate higher than inflation over any significant period, but you have to be careful not to invest money directly in property that you might need at short notice. If you were to try to get your money out when the property market was depressed, you might not be able to do so without incurring a big loss.
A few banks and building societies, such as Birmingham Midshires, offer ISA savings accounts which are guaranteed to provide a small, tax-free return in excess of inflation. If you need a reliable return over a small number of years, this might be for you, but the return is certainly not generous.
Investing in company shares and reinvesting the dividends has beaten inflation in the UK over most periods of a few years or more. Timing is everything with these. If you buy and sell at the right times, you can make a lot of money, but of course the markets can go down as well as up. Bad timing can produce big losses. To give yourself the best chance of making a profit in excess of inflation: (a) Put your investment in a stocks and shares ISA so it is exempt from tax, and (b) Get an expert fund manager (such as Moneyfarm), who understands the markets and is committed to keeping charges as low as possible, to make the investments for you.