Don’t Let Inflation Impact Your Wealth

With inflation still running high and interest rates rising, remaining in cash can impact your wealth over time if you avoid equity markets altogether.

· In periods when inflation is high, and interest rates rise, it may feel safe to earn interest on cash rather than investing in equity markets which might seem volatile or uncertain.

· While one might be enticed by higher interest rates or yields from cash-equivalent investments (e.g. cash accounts, money market funds), the long-term impact to your wealth can be significant if you avoid equity markets altogether.

· The chart depicts the returns of US treasury bills, which can be considered as a proxy for cash, and US equity markets during periods of inflation exceeding 2% (the target inflation rate set by most central banks to control inflation). This scenario reflects the current economic environment.

· Equites tend to do well as most see their revenues, and earnings, usually rise with inflation, thus offering a degree of inflation protection. When inflation and interest rates drop, those earnings can often hold up, unlike your bank account where the interest rate will fall.

· The National Institute of Economic and Social Research (NIESR) does not expect the Bank of England to reach a target of 2% inflation until 2025, so if you wait until then, you may be out of the market for some time.

· A more prudent approach would be to allocate to the right asset classes and investment funds which can help you navigate through these periods of high inflation.