Do you feel like the news is all doom and gloom? Ever rising energy prices and food bills. Inflation. Increased mortgage costs. Strikes. Your travel plans out of kilter, either from a delay in receiving your passport, or trying to locate your lost luggage?

The famous phrase “Let them eat cake” has often been attributed to Marie Antoinette, highlighting the Queen of France’s disregard for the starving peasants’ plight, which helped contribute to the French Revolution in 1789. In reality, the phrase was recorded as early as 1765 by Jean-Jacques Rousseau. However, it does serve to highlight how dangerous it is to underestimate the impact of a starving population. History is filled with examples of political unrest attributed to this issue. As food inflation rises around the world, and the cost of living increases, we have already seen governments begin to recognise this very concern.

It may be too early to tell how the Omicron variant of COVID-19 will affect the Bank of England’s decision to raise interest rates. Despite their initial concern, the Bank decided to increase rates in December and, with market expectations appearing to reflect a belief that the current inflationary environment is not transitory, further increases may be on the way.

So when it comes to preparing your portfolio for inflation, what should you do?

Each market correction is different, and not all volatility is the same. There are times, like the COVID crisis, where bonds and equities fall at the same time. On other occasions, bonds can provide diversification against a falling equity market. During the initial drawdown at the end of January, bonds remained relatively stable when equities fell, providing some insulation for 60/40 portfolios. However, in the drawdown at the end of February, bonds fell in line with equities, pushing the drawdown for 60/40 portfolios to be closer to that of equities, and not what one might expect from a “balanced” portfolio.

The recent collapse of a number of energy companies demonstrates the perils, for the most part, of concentrating too much attention on just one aspect of an investment decision – the cost. With regards to investing, this incident highlights the important consequence of not assessing all inherent risks in making an investment decision and, by extension, managing a portfolio. In our unending pursuit of higher returns, whether that’s through low-cost passive products, or investing in technology stocks, have we been ignoring these risks too long? Is now the time to balance risk with returns?