THERE is not a day that goes by that we don’t read or hear about heightened inflation, prices going up and the cost of living getting dearer. Leading economists differ over whether it is transitory or here to stay. However, one thing is certain, inflation is now a feature of our lives and one that is not going away quickly. Indeed, inflation is like a silent deadly gas, one that you cannot see but that can wreak terrible damage. It erodes our spending power, and we realise its impact after it’s too late.

I recently came across an interesting rule termed ‘the rule of 70’ in the context of inflation. If you divide 70 by the current rate of inflation, this tells you how quickly the value of your investment will get reduced to half its present value. For example, an inflation rate of 7% will reduce the value of your money to half in 10 years’ time - shocking when you consider the current inflation figures being bandied about.

The cost of a pint of Guinness when I left the Jes school here in Galway in 1982 was 99p (€1.26). 40 years later the cost of a pint of Guinness in my local is €5. That’s nearly a 400% increase in that period. This gives you a flavour of the silent deadly killer called inflation. Prices rose in Ireland by 9.1% in the year to July 2022 compared to July 2021! The projection by the Economic and Social Research Institute (ESRI) for annual inflation in Ireland for 2022 is 7.1%. Therefore, in simple terms, if you want to protect the purchasing power of your money into the future, it basically needs to track the increases in the pint of the plain stuff, as minimum.

Many investors have never really experienced the level of inflation that has come to our doorsteps in the last few months. So, what should investors be considering now during this period of heightened inflation? There is a myriad of investment options out there. Putting your monies on deposit may seem like the safe way to go but it ignores the vital protection you require against rising prices and protecting the real value of your investment over the long-term. We recommend you seek the help of an investment professional who will be happy to discuss your options. Potential asset classes that should be considered for their inflation proofing effect are as follows:

  • 1. Equities (Shares) Shares could be worth considering. Over the long-term (10+ years)equities have been an asset class that have produced excellent real returns (after inflation). In general stock markets have historically provided an excellent hedge against inflation for investors of all budgets. If one looks at the S&P 500 Index (the index of U.S. stocks) over the last five years, it delivered a total return of circa 68.72% over this medium time frame. The cumulative level of inflation for this period in the US was 21.1%.
  • 2. Real Estate Property (REITS) There are alternatives to investing in physical property. One could consider investing in real estate investment trusts or REITS as they are commonly known. These are large companies that manage and own property. REITS can provide a steady stream of dividends to investors which can also function as a hedge to heightened inflation. Shares of publicity listed REITS are quoted on stock markets which make them extremely liquid. They also have been afforded very favorable tax treatment by our government.
  • 3. Commodities There are a few commodity options including water and energy. Gold is often mentioned by investors as a safe haven in times of global economic uncertainty and a good hedge against inflation. It is a particularly good defensive asset. Interestingly during the financial crisis of 2007-2008 the stock market fell by circa 33% while the precious metal dipped by only 2%! During the recent pandemic, some investors fled to this precious metal. It is currently priced at circa $1,750 per ounce. A rule of thumb I would advise is to limit gold exposure to no more than 5% to 10% of your portfolio. The one thing the financial crisis taught investors was to make sure your overall investment portfolio is diversified; don’t be overly exposed to one asset class. If the mantra for buying a property is location-location-location, the mantra for investing is diversify-diversify-diversify.

    • Niall Rooney B.Comm.ACII.QFA.FLIA is a Financial Planning Manager with CityLife Galway 091-520608 niall@citylifegalway.ie