Investing during high inflation

[JohnW]

My concern is that inflation devalues savings in the bank at a higher rate than the interest the banks pay. A far higher rate in my experience, so cash in the bank seems a Bad Idea whatever the inflation environment.

It's an interesting topic for a discussion forum.
Everyone's experience can be different I'm sure, but for some perspective if you look at the return on 'cash' (savings deposits, not under the mattress) for the last 50 years for USA, you find a real (after inflation) return of 0.67% CAGR. Over the last 30 years cash has held its own. You can find similar UK data here https://portfoliocharts.com/2017/05/12/ ... -investor/. It can be a bit easy to write-off cash as an asset class.

And yet governments respond to inflation by putting up interest rates which in turn, causes asset values to fall, so share portfolios also seem likely to me to fall in value, in the most general terms. Is this correct?

I have no idea but it sounds plausible. But there are a zillion other factors tossing share values around in their usual choppy manner. Surely, don't imagine picking out only one will give you any reliable guide as to the future while the scores or hundreds of other factors are ignored.

So getting to the point, where might be good places to put one's capital to protect its value, still get some growth or at least minimise its devaluation, if one thinks there is persistent inflation coming? Some risk is acceptable. Shares? Bonds? (What are bonds anyway?) Cash in the bank? Something else? What? Maybe there is nothing.

There has been inflation every year without exception in UK back at least 30 years, indeed persistent, and we might expect that to continue. It's 'business as usual' on the 'persistent inflation' front I'd suggest. Your portfolio was constructed in the past around the likelihood of ongoing inflation as well as equity crashes, bond crises and whatever else might annoy you; there seems no need to change anything now because of speculation about one element of the financial landscape.
As interesting as it might be to discuss as a topic, it doesn't seem actionable to me which makes it a bit of a time waster.

[Mike4]

My concern is that inflation devalues savings in the bank at a higher rate than the interest the banks pay. A far higher rate in my experience, so cash in the bank seems a Bad Idea whatever the inflation environment.

It's an interesting topic for a discussion forum.
Everyone's experience can be different I'm sure, but for some perspective if you look at the return on 'cash' (savings deposits, not under the mattress) for the last 50 years for USA, you find a real (after inflation) return of 0.67% CAGR. Over the last 30 years cash has held its own. You can find similar UK data here https://portfoliocharts.com/2017/05/12/ ... -investor/. It can be a bit easy to write-off cash as an asset class.

Well as is often the case, we have a semantics problem here. By 'cash", I mean cash mouldering away in the bank current account or building society savings account earning zero or near-zero interest instead of being invested somewhere. Your very interesting and educating article (thank you!) is about how cash invested in "Treasury Bills" or "short term bonds" just about keeps up with inflation historically, so we are talking about different things.

So thank you, I get your point, there ARE places to put cash to keep pace with inflation. I suspected this might be the case when I asked in my OP what bonds are, but until you posted I had absolutely no idea where that would be. Now I have a signpost at least.

Treasury Bills and short term bonds are, presumably 'safe as houses' being government backed? If not, they are not actually equivalents to cash surely and the whole comparison becomes unfair. Next question now becomes, how does one buy "Treasury Bills" or "short term bonds", or perhaps who sells them?

[Mike4]

There has been inflation every year without exception in UK back at least 30 years, indeed persistent, and we might expect that to continue. It's 'business as usual' on the 'persistent inflation' front I'd suggest. Your portfolio was constructed in the past around the likelihood of ongoing inflation as well as equity crashes, bond crises and whatever else might annoy you; there seems no need to change anything now because of speculation about one element of the financial landscape.
As interesting as it might be to discuss as a topic, it doesn't seem actionable to me which makes it a bit of a time waster.

Surely not a time waster given the board we are on.

AIUI, a basic principle of economics in that inflation is a Bad Thing, so a responsible government would pull the levers at their disposal to get inflation hovering at zero. The trouble with this is that once it dips into the negative i.e. deflation, a runaway effect kicks in where the population (rationally) delays spending decisions because tomorrow prices will be lower so it makes sense to wait. This damages economic activity horribly so the prudent government pulls it's levers (primarily the base rate) to avoid this risk by engineering modest inflation - 2%-3% being considered ideal in recent times.

Now though, some of us feel that inflationary pressures are building which the government cannot control which means the happy situation of 2-3% inflation over the last decade or two is coming to an end, so the 'business as usual' of which you write, where the government is pro-actively keeping inflation around 2-3% is coming to an end and uncontrolled inflation is galloping towards us. You appear to disagree with this in your first sentence I quoted above and say 'business as usual' will continue, which interests me. Do you hold that our government will continue to keep the lid on inflation perhaps? Many thanks.

[88V8]

Now though, some of us feel that inflationary pressures are building which the government cannot control which means the happy situation of 2-3% inflation over the last decade or two is coming to an end, so the 'business as usual' of which you write, where the government is pro-actively keeping inflation around 2-3% is coming to an end and uncontrolled inflation is galloping towards us.

No govt wants to tell voters that the party's over, so they are all looking the other way.
And if rates rise, govts face a large increase in the cost of servicing their debt.
So whatever they do will be too little too late.
And it's not all controllable anyway... energy prices, ... Russia.
I agree, we are headed for a burst of inflation.

But... for how long... a prime area of damage one would think, would be the Fixed Interest market. Why hold Prefs at a 5% yield when inflation is at 5%... and yet, Prefs prices are not falling.
The market does not seem to be expecting more than a blip.

GS has been banging the drum for a while on Bank ords. The big banks are back to paying a divi, if rates rise their margins will improve. He may be right.

After all, if we expect inflation of say 5% for say two years, that's only a shade over 10% that's needed to stand still.
SP rise + divis, not a big ask.

V8

[JohnW]

Yes, more clarity needed. My baby nephew is a little time waster in that I could enjoy watching him goo and gah for ages, and so I enjoy the discussion you raised, but based on limited speculation it doesn't seem to get one very far in deciding how to invest; but as it airs the inflation, cash matter I guess it's productive as well as largely taking us nowhere.
By cash I also meant a savings account, not a very short term government debt security. I used portfolio visualiser for my US data. It distinguishes between cash and short term treasuries, and if you analyse a 'cash' fund with its ticker symbol you get the same result; so my guess, only, is that it's taking about the cash you and I are interested in - mouldering in a savings account.
Secondly, the portfoliocharts data is not cash, as you say. But it suggests the short term government debt security yield is a useful surrogate for studying 'cash' returns. The yield on a 4 month UK bond is now .075%/year; correct me if I'm wrong, but surely you can get an interest bearing deposit account in UK now returning well over that even with instant access. Only guessing, but it's not chalk and cheese even if it's not cheese and cheese. And yes, I'd say government securities are as secure as government backed bank accounts.
Can't help with buying government securities outside a fund, nor do I think it's worth the effort unless you're liability matching with index linked bonds.
By 'business as usual' I had in mind that the same old push/pull economic drivers and government responses that existed in recent decades will continue in the next decade; wasn't suggesting inflation would be as it was. Things will pan out in their own way, maybe like the past and maybe not. We need to be set up for all the important scenarios that have a high enough probability of happening - a sort of portfolio for all seasons unless you want to take a punt on something.

[Dod101]

I don't know much about Banking investment trusts but I have invested in lyxor stoxx europe 600 banks ucits ETF for my kids. There are probably many others too.



GS

Thanks for the suggestion. Appears to have done well this year so far!!

The next step in my edumacation then, is to figure out exactly what an ETF is and how it differs from an IT. Been meaning to do this for a while, so now I have a reason

I know nothing of the quoted fund but in any case do not get too carried away with investing in banks. If they do well it will be for the first time in 15 years or more that they do. Maybe their time has come but also watch that this trust and others are not substantially invested in bank debt which of course is very different from investing in bank equity. And make sure that a banking investment is but a (small) part of a portfolio!

Dod

[dealtn]

... in any case do not get too carried away with investing in banks. If they do well it will be for the first time in 15 years or more that they do.

Really?

They are up 30-40% in the last year. Over the last two years have doubled. Both periods appear to me to be in the last 15 years. How are you defining "do well"?

[richfool]

One of my main holdings is Capital Gearing Trust. They hold 30% US Treasury Inflation-Protected Securities (TIPS) which offer some protection when you get a stock market correction, and inflation protection.

The current yield on US TIPS is negative and varies from -0.5% to -2% which isn't appealing.

There must be some merit in holding US TIPS and index-linkers, as Capital Gearing Trust, Personal Assets and Ruffer all hold significant quantities of them.

I also note that Ruffer and Law Debenture (LWDB) hold several UK banks.

[BT63]

AIUI, a basic principle of economics in that inflation is a Bad Thing, so a responsible government would pull the levers at their disposal to get inflation hovering at zero.

Governments aren't usually responsible. They merely give the illusion that they intend to be responsible.
The ideal situation for a government is where can they borrow/create lots of money (so they don't have to cut spending or raise taxes) without inflationary consequences or, like the present, where there are plenty of people happy to lend to them at negative real rates.

The current interest rate and inflation situation brings to mind the phrase: 'Gradually boiling a frog'.

I expect negative real rates to persist in the UK for many more years. The BOE will frequently release statements to calm things down and to sound like they're on the ball but in reality they will probably remain far behind the curve until we reach a crisis point.

What concerns me is the tendency for mean reversion in financial markets. The longer real yields remain negative, the longer they might be positive in the future.

[BT63]

There must be some merit in holding US TIPS and index-linkers, as Capital Gearing Trust, Personal Assets and Ruffer all hold significant quantities of them.

They probably expect demand to increase and prices to rise so they can offload them at an even higher price to an even greater fool.

I have respect for the funds/trusts mentioned, so they'll probably be on the right side of the trade.

I don't have data, but I wonder what happened to linkers in past inflationary situations?

[richfool]

There must be some merit in holding US TIPS and index-linkers, as Capital Gearing Trust, Personal Assets and Ruffer all hold significant quantities of them.

They probably expect demand to increase and prices to rise so they can offload them at an even higher price to an even greater fool.

I have respect for the funds/trusts mentioned, so they'll probably be on the right side of the trade.

I don't have data, but I wonder what happened to linkers in past inflationary situations?

They have held them on an ongoing basis, and view them as protection, so I don't think they hold them for speculative purposes or taking quick profits.

[BT63]

There must be some merit in holding US TIPS and index-linkers, as Capital Gearing Trust, Personal Assets and Ruffer all hold significant quantities of them.

They probably expect demand to increase and prices to rise so they can offload them at an even higher price to an even greater fool.

I have respect for the funds/trusts mentioned, so they'll probably be on the right side of the trade.

I don't have data, but I wonder what happened to linkers in past inflationary situations?

They have held them on an ongoing basis, and view them as protection, so I don't think they hold them for speculative purposes or taking quick profits.

With a negative real yield, they won't make money on them in the long term, so they must be hoping to offload them at some point, or are expecting things to be so bad that -2% p.a. would be a good outcome.

[CryptoPlankton]

... in any case do not get too carried away with investing in banks. If they do well it will be for the first time in 15 years or more that they do.

Really?

They are up 30-40% in the last year. Over the last two years have doubled. Both periods appear to me to be in the last 15 years. How are you defining "do well"?

This isn't the first time you've used the period post the "Covid crash" to suggest equities have done well. A glance at Lloyds and HSBC shows that neither has recovered to their SP pre-Covid. A pedant could argue that any company with an upward movement in SP is doing well but, by that measure, so is just about every other share that took a hammering last year - many of which have done much better by going on to new highs. Basically, if you bought the market at the bottom, you would have done well but there are numerous individual shares out there that have done better than the banks.

[dealtn]

... in any case do not get too carried away with investing in banks. If they do well it will be for the first time in 15 years or more that they do.

Really?

They are up 30-40% in the last year. Over the last two years have doubled. Both periods appear to me to be in the last 15 years. How are you defining "do well"?

This isn't the first time you've used the period post the "Covid crash" to suggest equities have done well. A glance at Lloyds and HSBC shows that neither has recovered to their SP pre-Covid. A pedant could argue that any company with an upward movement in SP is doing well but, by that measure, so is just about every other share that took a hammering last year - many of which have done much better by going on to new highs. Basically, if you bought the market at the bottom, you would have done well but there are numerous individual shares out there that have done better than the banks.

No, that's not my claim. I am claiming that there are a number of periods in the last 15 years that bank shares (and it is true also of others, and equities as a whole asset class) have done well.

Another poster is making a claim they haven't.

[fisher]

Not sure if this is the right board but here goes anyway. I'm looking for some guidance on basic principles of investing please.

My concern is that inflation devalues savings in the bank at a higher rate than the interest the banks pay. A far higher rate in my experience, so cash in the bank seems a Bad Idea whatever the inflation environment.

And yet governments respond to inflation by putting up interest rates which in turn, causes asset values to fall, so share portfolios also seem likely to me to fall in value, in the most general terms. Is this correct?

So getting to the point, where might be good places to put one's capital to protect its value, still get some growth or at least minimise its devaluation, if one thinks there is persistent inflation coming? Some risk is acceptable. Shares? Bonds? (What are bonds anyway?) Cash in the bank? Something else? What? Maybe there is nothing.

(I know the BoE etc all say the coming inflation will be temporary, but they would say that wouldn't they. I can imagine inflation persisting at an alarmingly high rate for a number of years before they finally get a grip on it again, given the inflationary pressures everywhere I look.)

Many thanks....

I recently had quite a bit of cash available that I wanted to keep "safe". I didn't want it sitting earning a pittance in a building society account, so I bought shares in Capital Gearing Trust (CGT) that has already been mentioned earlier. It is not 100% safe, but its raison d'etre is to preserve wealth and it seems to have done that very well over many decades.

You can read about Capital Gearing Trust here: https://www.capitalgearingtrust.com/homepage

Personal Assets Trust is also similar and you can read about that here: https://www.patplc.co.uk/#

Depending on how much you want to invest you can, of course, invest in both.

Ruffer Investment Company (RICA) is also similar and may be worth looking at: https://www.ruffer.co.uk/en/funds/ruffe ... nt-company

[CryptoPlankton]

Really?

They are up 30-40% in the last year. Over the last two years have doubled. Both periods appear to me to be in the last 15 years. How are you defining "do well"?

This isn't the first time you've used the period post the "Covid crash" to suggest equities have done well. A glance at Lloyds and HSBC shows that neither has recovered to their SP pre-Covid. A pedant could argue that any company with an upward movement in SP is doing well but, by that measure, so is just about every other share that took a hammering last year - many of which have done much better by going on to new highs. Basically, if you bought the market at the bottom, you would have done well but there are numerous individual shares out there that have done better than the banks.

No, that's not my claim. I am claiming that there are a number of periods in the last 15 years that bank shares (and it is true also of others, and equities as a whole asset class) have done well.

Another poster is making a claim they haven't.

So, just a pedantic point then. I'm sure Carillon had periods of days, possibly even weeks, of "doing well" shortly before its demise - presumably to suggest that it didn't do well at all during its last year or two would attract the same criticism? Still, can't argue with the logic I suppose...

[Dod101]

... in any case do not get too carried away with investing in banks. If they do well it will be for the first time in 15 years or more that they do.

Really?

They are up 30-40% in the last year. Over the last two years have doubled. Both periods appear to me to be in the last 15 years. How are you defining "do well"?

Historically they have been a very poor investment. Many shares are up significantly in the last year. I want them to do well over a five or ten year period not in one particular year. Short termism or what?

Dod

[Dod101]

There must be some merit in holding US TIPS and index-linkers, as Capital Gearing Trust, Personal Assets and Ruffer all hold significant quantities of them.

They probably expect demand to increase and prices to rise so they can offload them at an even higher price to an even greater fool.

I have respect for the funds/trusts mentioned, so they'll probably be on the right side of the trade.

I don't have data, but I wonder what happened to linkers in past inflationary situations?

Actually I know nothing of US TIPS but I cannot believe that the portfolio managers of CGT, Personal Assets and Ruffer are all fools which is what you imply. In fact I am certain they are not. I am sorry to say that it makes you look as if you know better than any of them, in which case you should be running them. That would help all os us.

Dod

[richfool]

There must be some merit in holding US TIPS and index-linkers, as Capital Gearing Trust, Personal Assets and Ruffer all hold significant quantities of them.

They probably expect demand to increase and prices to rise so they can offload them at an even higher price to an even greater fool.

I have respect for the funds/trusts mentioned, so they'll probably be on the right side of the trade.

I don't have data, but I wonder what happened to linkers in past inflationary situations?

Actually I know nothing of US TIPS but I cannot believe that the portfolio managers of CGT, Personal Assets and Ruffer are all fools which is what you imply. In fact I am certain they are not. I am sorry to say that it makes you look as if you know better than any of them, in which case you should be running them. That would help all os us.

Dod

Indeed. In fact, this part got missed from the quote of my earlier posts, which was making the same point, albeit more subtly:

They have held them on an ongoing basis, and view them as protection, so I don't think they hold them for speculative purposes or taking quick profits.

[Dod101]

They probably expect demand to increase and prices to rise so they can offload them at an even higher price to an even greater fool.

I have respect for the funds/trusts mentioned, so they'll probably be on the right side of the trade.

I don't have data, but I wonder what happened to linkers in past inflationary situations?

Actually I know nothing of US TIPS but I cannot believe that the portfolio managers of CGT, Personal Assets and Ruffer are all fools which is what you imply. In fact I am certain they are not. I am sorry to say that it makes you look as if you know better than any of them, in which case you should be running them. That would help all os us.

Dod

Indeed. In fact, this part got missed from the quote of my earlier posts, which was making the same point, albeit more subtly:

They have held them on an ongoing basis, and view them as protection, so I don't think they hold them for speculative purposes or taking quick profits.

We are in agreement. Well done! I am not, as you may know, very subtle. Can't be bothered these days and prefer the direct approach.

Dod