We, as in the residents of our small Island, have always had to live with inflation, if for no other reason than so many of our goods are imported.
This means our inflation can be even more than that of the large island next to us; in fact our headline rate of inflation tends to be up to 1% higher than that island, which means that from an investment and savings point of view we need to get even more bang for our Manx bucks.
Now, I’m not going to tell you about how bad bank interest rates are – you’ve been hearing this for close to ten years.
What is new though is how high the present CPI headline rate in the Isle of Man is at a whopping 4.0%!
This means that, in real terms, the value of your savings or salary is shrinking in spending power by four percent – unless you take action to protect them.
What makes inflation really bad however is that it erodes your money invisibly– unless you come to spend it.
So if it’s sat in your bank account earning, well not a lot, then it might feel like it’s fine, but in reality it’s quietly disappearing.
On the savings front, according to Money-Facts the best rate on the Island is with Santander, a fixed 24 month savings bond at 1.24%. Which means, not only are you guaranteed to lose money, but you’ll also have to lock it away for two years, just for the privilege.
Of course, the big question in this climate is whether there’s likely to be a rate change which could improve this situation.
But if there isn’t, what are our alternatives?
Another thing to remember with investments, by the way, is that inflation isn’t the only thing we’ve got to take into account. There’s another assassin; charges.
There are some 21 million premium bond holders in Britain, as in recent years people taking the view that as savings rates are so low, they may just as well try to win some prizes with their cash.
However the first thing I would ask anyone before investing in these is, “How lucky are you”? The chances of winning a prize are 30,000 to 1.
There was a time when you could buy Corporation Bonds on the Island from your local commissioners for a quite decent income yield – however, those days seem to be long gone now.
When we talk about Corporate bonds though, this is something quite different. Corporate Bonds are bonds issued by companies; essentially IOUs to raise money, with set terms after which the money invested is returned. They can be (and have been) ideal as fixed income sources over the years but, in the present climate, there has been a question mark over their continued use. Remember, as inflation rises, bonds drop in price because the risk that the investor is taking for the associated return becomes less attractive (that’s me over-simplifying the bond market, but you get the principle).
The other small matter to note is that, in general, they provide income, not capital growth.
In general, equities have provided a decent hedge against inflation over the years, although one should also factor in the risk associated with this, remembering that companies usually raise prices to absorb the rising costs brought about by inflation. In other words, they can simply pass on the higher costs to the consumer.
When companies increase their prices, their revenues and earnings also increase.
The higher the earnings, the higher their valuation, which leads to higher share prices.
The problem is that not every investor can cope with these price movements, especially if you’re only used to more stable savings products.
Gold has previously been dubbed the ultimate safe haven, but sadly gold prices are volatile too.
The Brexit vote and Donald Trump’s election drove demand to a four-year high in 2016 as pension funds and other institutional investors piled into “safe” gold.
The problem was that no sooner had investors piled in seeking safety, when the world didn’t melt away, they came out of gold once they began to feel brave enough.
Bottom line: If you have gold, then you really need something else alongside it to smooth things out a little.
Buy to Let
Ah…the old bricks and mortar.
We’re actually very fortunate on the Island. We can hold buy-to-let property inside of our pensions (that’s a future blog, btw) whereas in the UK they’re not allowed to, unless it’s a commercial property.
However, whether it’s held inside or outside of a pension, property has provided a reasonable return over the years on the Island, although this has slowed somewhat since 2008.
Property does bring its own set of risks and rewards, none greater than the fact that it’s highly illiquid (should you need cash quickly) and of course can limit diversification in your portfolio because of its sheer size, as we have to usually buy it in complete chunks, unless it’s a property fund. In other words, should property values fall, then the portfolio is not diversified enough into other asset classes to offset that fall.
This could of course be said of any asset class that dominates a portfolio, but as we are talking about bricks and mortar and its illiquid nature, then there’s a particular disadvantage with property.
So WHAT IS the bottom line?
For me, unless you’re an expert in any of the above mentioned markets, then you’re going to be taking an unnecessary gamble by involving yourself in them without getting some advice.
And that advice doesn’t have to be with a Financial Planner either; many investment companies or stock brokers offer discretionary management services which will blend for you the above various asset classes (plus a few more) into a nicely mixed portfolio.
They all charge for their services of course, and a close eye must be kept on this to ensure that the net results after charges are still very much in your favour. But ultimately, until we see interest rates matching inflation, then trusting experts to put together a mix of asset classes for us remains one of the best ways to help combat that insidious investment assassin; inflation.