In times of high inflation, the potential for investments to reduce in value in real terms can cause a lot of concern for investors. In our current high inflationary period, where rates have reached 5.5%, it can be very challenging, if not impossible, to maintain an investment’s real value. Yet, what all investors need to keep in mind is the long-term ambitions for their investments.

When considering the longevity of your investments, shorter-term volatility should be a time for maintaining investment resilience rather than ‘inflation-beating’ tactics. Yet, at the same time, periods of volatility can also create opportunities, which savvy investors may take advantage of.

How can I build inflation resilience into my investments?

There are a number of practical measures investors can take to keep their investments resilient to inflation. But first and foremost is to take professional advice from an independent adviser who can guide you through the best options available to you.

Avoiding high cash balances

When you see a fall in your investments, you may be tempted to believe that the best option is to pull out of the markets altogether and move your portfolio into cash. However, there are two reasons why this may be counterproductive to your long-term investment goals.

Firstly, high inflationary periods cause currency to devalue, meaning that cash balances are often the least resilient option to high inflation. Secondly, although the markets may experience greater volatility during these periods, they can also provide an opportunity for buying into investments while they are at a low rate. If you are approaching your investments with a long-term view, neither of these scenarios are desirable and could ultimately be detrimental to your potential investment growth in the future.

Maximising your tax and investment allowances

As we approach the end of the financial year, now is a good time to review your tax and investment allowances with an independent adviser. During a period of high inflation this is especially important as using your personal allowances can help weather your cash assets from devaluation.

Pension allowance

The personal allowance for pension contributions each tax year is £40,000 before tax is due. Your annual allowance applies to all of your private pensions. This includes the total amount paid in to a defined contribution scheme by you or anyone else (such as an employer) and any increase in a defined benefit scheme in a tax year.

ISA allowance

The annual allowance for combined ISA investments is £20,000 for the 2021/22 tax year. There are various types of ISA and it’s a good idea to invest in different ones each tax year, so you spread the risk. However, in high inflationary periods it’s important to seek professional advice on ISA investments and inflation resilience options as cash ISAs could prove detrimental.

Diversifying your portfolio for inflation resilience

Opting to diversify your investment portfolio can help to weather market volatility through times of high inflation. An independent adviser can talk you through the options available in the management of your portfolio, based on your attitude to risk.

Regularly reviewing your investments and portfolios

What has become clear over this period of high inflationary growth is the state of greater unpredictability in the markets. For this reason, it is critical that investors regularly review their investments to have the best chance of maintaining resilient to the pressures of inflation and market volatility.

Yet, while there is unpredictability present, high inflationary periods are not new. This experience gives asset managers and advisors vital information in responding to these times. History has shown that rebounds can return many portfolios positive in just a few years, (or even months as demonstrated in 2018 and 2020).

Ultimately then, there are a number of options available to investors to help maintain investment resilience through times of high inflation. A well-researched, professionally managed, and diversified portfolio will have the best chance of weathering these times as long as investors maintain their long-term outlook.

PLEASE ALWAYS REMEMBER: Grosvenor Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority. The value of investment can go down as well as up and you may not get back the original amount you invested. Tax treatment is dependent on individual circumstances and may be subject to change. Tax planning is not regulated by the Financial Conduct Authority.