Do not let Inflation eat into your cash

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The Governor of the Bank of England recently stated that interest rates will not rise for the foreseeable future. Most western governments are saying the same thing. This means that interest rates will stay below the level of inflation for years to come.

This is not good news for savers as they have had to endure this situation for the last few years already. It is especially bad for those in the elderly age groups as they suffer from inflation more than others since they spend a higher proportion of their income on fuel and food.

However, the reality of it is that we have all suffered negative returns on cash; i.e., inflation has exceeded savings/deposit rates thereby meaning we are losing money even though we are putting money aside for the future.

What are the alternatives? For those who are prepared to take risk then there is the option of investing in growth funds. Recent figures show that more and more people are having to do this. This is where fund choice is so vital. For those getting into investments for the first time it is wise to go with a multi-asset, multi-manager type fund. These are usually less volatile than sectoral or geo-political type funds and reduce the risk of full equity exposure.

JP Morgan published figures last year which analysed the performance of a portfolio which invested 50/50 in equity and bonds over all five year periods since 1950. The maximum loss any of the periods was only one percent per annum and the biggest gain was 24% per year. When compared to a total investment in equities, the biggest loss was 7% per annum and the largest gain was 30% each year.

More interestingly, if the money from the mixed-asset investments was left for ten years then none of the period actually lost money. The report states, “Diversification works – so don’t be afraid to be in the markets if you have a long-term horizon.”

However, as most people know, bonds have been going through a tough time recently so it is difficult just to go with a 50/50 mix. A real multi-asset fund will consist of equities, bonds, cash, property, alternative investments, commodities, et al.

It is also vital that people understand the product they are getting into. Some carry charges that are not immediately obvious and can eat into your overall returns. It is equally important to know the difference between growth and income funds. The complexity of some of the information out there is mind-bogging at times and it is possible to get badly hurt.

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]