Rising Inflation, Rising Interest Rates: Invest or save?

With the rising cost of living at the top of everyone’s minds, people are wondering if they should be saving, how they can make that a reality and when you add in rising interest rates people are curious as to what is the best financial plan for them; the experts at private and commercial banking firm Arbuthnot Latham have provided their expert view on the rising interest rates and how that impacts savings.

Searches for interest rates are up 243% since the start of June while searches for phrases such as ‘ways to save’ and ‘should I be investing?’ are up by 125% and 85% since the start of June.

Generally speaking low inflation and low-interest rates discourage savers.

People’s savings have not been earning much interest and their real-term loss in value has been limited by low inflation levels. Those wanting above-inflation gains to their savings only needed to beat modestly low inflation to end up on top.

That time is over.

Central banks across the world are increasing rates and the long post-covid recovery, compounded by the Russian invasion of Ukraine has hit the markets hard and created a bear market. It can be hard to feel confident about investing when markets are down, however, sometimes the best opportunities are presented when things are looking their worst. So how can you protect your capital in times of uncertainty?

5 tips for protecting capital in uncertain times:

 

1. Review your cashflow

It is important to understand your various sources of income and the assets you have, what purposes they serve and when you need to access them.

By mapping out your planned income and expenditure, you can identify opportunities for longer-term planning. If you have assets, you do not need to access for five years or more, investing can help you grow your assets with a view to beating cash returns.

2. Cash Rates

Everyone needs cash- the amount you need and how long you need it for will be personal to you and your circumstances. Savings rates are higher than they have been for decades, and the best are found in fixed-term deposits, but in a rising interest rate environment, you need to decide how much and for how long you want to fix.

If you believe that interest rates might increase over the next 12 months and that more attractive rates are yet to come, you could spread your money over fixed-term deposits over different periods of time and interest rates. This approach is known as laddering and offer you more flexibility, allowing regular access to your money on each maturity,

3. Diversify

Diversifying your investments reduces your exposure to risk. If one asset class is performing badly, others may stay the course. By investing in a mixed asset portfolio, you have exposure to underlying investments which react differently to external factors.

Assets might include shares, government and corporate bonds, commodities- such as precious metals, oils or crops- commercial property, hedge funds and foreign exchange.

Over time, diversification mitigates short-term volatility by spreading your portfolio across different asset classes and strategies while active management allows you to benefit from short-term market opportunities.

4. Tax Efficiency 

Investing in tax-efficient vehicles, such as ISAs and pensions, allows you to grow your wealth free from income and capital gains tax. Through reinvesting gains, you will benefit from compound growth over time.

A wealth planner can advise on the most tax-efficient structure for your wealth, and that of your family and business.

5. Protect your assets 

During times of uncertainty, it is important to protect what matters you. This could mean a lump sum to provide financial security should the unthinkable happen. Business protection can also help stabilise a business, giving you the financial cushion, you might need, should the unexpected occur.

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