Inflation is running at the sort of levels last seen in the 1970s and early 1980s. Depending on how long this lasts, investors must guard their wealth against erosion. What ideas are out there?

Inflation is running hot around the world. In the UK, consumer prices rose by 7.0 per cent in March from a year before, the highest 12-month rate since national statistics covering this started in January 1997. In the US, inflation of around 8 per cent is at the highest rate since 1981, when Ronald Reagan was US president. 

What should private clients do about it? 

“In the first instance, individuals should consider talking to a wealth manager about the pros and cons of investing versus holding cash on a fixed term deposit,” Paul Clifton, senior wealth planner at Arbuthnot Latham, the UK bank, said in a note to WealthBriefing. “Inflation is at its highest level for 32 years; this has the potential to seriously erode the value of your savings over time.”

“It might also be worth increasing precautionary savings by reducing or postponing discretionary spending. Holding a contingency/emergency fund in cash will be important and with interest rates on the rise, fixed term and notice accounts are now paying better rates than six months ago,” Clifton said.

There are a number of ways to put in protections, investment figures say.

“Our focus is on inflation protection, high quality credit and Asia. Fixed income investors should not fear duration. The upside for nominal yields will likely be capped by debt refinancing constraints, central bank actions and demand for safe havens,” Richard “Dickie “ Hodges, manager of the $3.9 billion Nomura Global Dynamic Bond Fund, said in a note. “At the same time, inflationary pressures are unlikely to subside anytime soon. Investors who want to retain the diversification benefits of duration while protecting their portfolios against inflationary risks will find in inflation-linked bonds a good solution in this environment.”

A tricky problem is that while inflation erodes wealth, trying to hold assets such as equities and real estate – traditional inflation hedges – isn’t without risks of their own. A weakening economy raises a 1970s-style spectre of “stagflation” that is an asset allocator’s nightmare. 

And beyond all that, there’s the challenge of whether people, including those in the affluent/high net worth bracket, are doing enough anyway to provide for retirement. Wealth manager Netwealth recently found in a survey that retirees aged 75 and above express many regrets over preparing for retirement highlighting vital lessons for younger generations. A quarter (25 per cent) underestimated how long they would be retired for and wished they had worked with an advisor, while two fifths (43 per cent) wished they had been better prepared for later life care costs. (More than 2,000 people were surveyed, including 1,068 pre-retirees with at least £50,000 ($65,2354) of investable assets and 1,024 retirees also with at least £50,000 of investable assets.)

Arbuthnot Latham’s Clifton said clients and advisors needed to roll up their sleeves.

“Sound financial planning is key. Much has changed over the past six months, and this is an opportune time to have an holistic review of your financial plan – your short, medium and long-term goals – and the impact this has on your investment, protection, retirement and estate planning,” he said. 

A rising risk of recession, concerns about rising prices and global volatility has recently prompted Liechtenstein-based VP Bank to confirm its defensive stance in the equity bucket of the portfolio. In addition, the bank is cutting its strong underweight – aka negative position – in government bonds and closing the position in Chinese bonds.

A traditional safe haven for investors worried about inflation and general fiat currency debasement is gold. The price of the yellow metal has been rising – with some short-lived dips over recent weeks. It traded at around £1,495 per ounce yesterday, having risen above £1,500 on 17 April and has moved up from £1,278 per ounce on 27 April 2021. 

Gold prices are high in currency terms, although when compared with long-term trends of asset prices, aren’t particularly expensive, noted Adrian Ash, director of research at BullionVault, a platform for trading precious metals. 

“Gold at £1,500 per Troy ounce might seem expensive, pretty much the most costly ever for UK investors. But the precious metal is currently 72 per cent below its record peak when priced in terms of the UK stock market, and gold's value against other assets also suggests that it isn’t over-priced today,” Ash said. 

“Gold prices have never been higher in currency terms, and that might raise a question mark for would-be investors. But gold priced in terms of other assets is currently far below its historic peaks, and today's surging inflation rate shows how the value of cash is also a price, one which is falling fast against most other things,” he said.

Legendary US investment figure Warren Buffett has stated that the best ways to protect against inflation is to invest in oneself (skills and capabilities) and own part of a strong business.

In a recent briefing note, Brewin Dolphin, the UK wealth manager being taken over by RBC Wealth Management, said investors should consider putting some cash into equities.

"You may have some cash set aside in a savings account. After all, it is generally considered wise to have around six months’ worth of salary set aside as an emergency fund. However, you may find you have more than is necessary. If so, consider whether you could move a portion of this into investments with better potential for long-term growth," the wealth management firm said. "Historically, by far the most effective investments at beating inflation over the long term have been equities – but you need to be comfortable that your investments will rise and fall in value."