According to the BBC, a leading UK think tank has warned that a typical household’s income could drop by about £1,000 this year once inflation is taken into account. It is the biggest real-time fall in income in nearly 50 years.

This is echoed by the Office for National Statistics (ONS), which revealed that inflation stood at 7% in March 2022, up from 6.2% in February. While the Bank of England (BoE) has increased its interest rate to 0.75% to help tackle the rising cost of living, Moneyfacts reveals that in March, the top easy access savings account offered 1%.

It also showed that the top fixed-rate deals, which means locking your cash away for up to five years, offered 2.4%. This means that current savings rates are significantly below the rate of inflation, which could devalue your cash in real terms.

A more effective way to help inflation-proof your wealth might be to invest it. That said, with the volatile stock market created by rising inflation, the ongoing Covid pandemic and the war in Ukraine, you might be wondering if it’s the right time to do this.

Read on to discover why it still might be, and how you may be able to limit the risks involved.

Investing could offer greater potential for your money

An ongoing study by Barclays suggests investing could be better for your wealth. Its Equity Gilt Study tracks the nominal performance of £100 invested in cash, bonds or equities in 1899, and publishes its findings annually.

In 2019, the study revealed that the stock market had outperformed cash in 91% of 10-year periods during the 120 years. It also showed that £100 invested in cash in 1899 would have been worth around £20,000 in 2019, compared to £2.7 million if you had invested the money into the stock market.

As you can see, investing could provide greater potential growth than cash, which could help inflation-proof your wealth.

You may be able to reduce the risks involved with investing

While investing might be a more effective way to protect your cash from inflation, it does carry risks. This has come into sharp focus in 2022, as the war in Ukraine and the rising cost of living resulted in a jittery stock market.

The good news is that experienced investors know that there are three clever ways to limit the risks involved with investing, which we will look at now.

1. Diversify

Spreading your investment funds over different industries, business sectors and regions could help reduce the effect of a stock market downturn on your money.

To demonstrate this, consider the following. During the Covid pandemic, if your investments were in travel companies, your portfolio could have seen a significant drop in value.

On the other hand, if your investment portfolio included a mixture of tech and travel company stocks, it could have been a different story. This is because the strong performance of the former would have helped counter the downturns experienced by the latter.

You could increase the protection offered by diversification by also spreading your investments across the globe. According to the BBC, in the year leading up to January 2021, the UK’s FTSE 100 index dropped 11.6% in the wake of the Covid pandemic.

This downturn could have been offset if you also had shares in Asia’s Nikkei index, which rose by 22.9% during the same period.

While diversification could be an extremely effective way of limiting the impact of a market downturn, always speak to a financial planner to ensure it’s done properly.

2. Invest for the long-term

While short-term volatility will always be part of investing, when it happens, the best strategy is usually to stay calm and take a long-term view.

Selling your investment to limit potential losses when the stock market drops, only deprives your money of the opportunity to recover when the market bounces back. Taking a long-term view and holding on to investments means you could recoup losses made during the downturn, and your money is still exposed to potential growth in the future.

To demonstrate this, consider the following graph, which shows the performance of the FTSE 100 index between 1 January 2021 and 31 December 2021. The index tracks the performance of the 100 companies listed on the London Stock Exchange with the highest market capitalisation.

Source: London Stock Exchange

As you can see, if you had sold your investments during any of the downturns you would have missed subsequent growth later on. Please remember, past performance is no guarantee of future performance.

3. Have the right level of risk

A cornerstone of investing is to understand the level of risk your money is exposed to. While potential growth usually comes from higher-risk assets within your investment, such as stocks and shares, care needs to be taken.

That’s because exposing your money to more risk increases the chances of short-term volatility. As such, investing is typically a balance between taking enough risk to offer the long-term potential growth you’re looking for, while at the same time, reducing the risk of potential losses if the market drops.

Speaking with a financial planner can help you achieve this, as they will assess the level of risk that’s right for you, and ensure that any investment you choose is right for your circumstances.

Get in touch

If you would like to discuss investing your money to help inflation-proof it or ways to ensure your investments are exposed to the right level of risk, give us a call. You can contact us by calling 0800 434 6337.

Please note:

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.