“When identifying the correct investment mix for you, it is extremely important to identify two pieces of information,” says Oliver O’Connor, head of private client and wealth management at Grant Thornton.
First, you need to understand why you are investing and identify your main objective. “If you do not have an objective, one could argue you should not invest. If it is for inheritance planning, children’s education, or retirement, this will help to identify the second key consideration: time horizon. Time is one of the most important factors which will influence your investment outcome. Whether you are a high-risk or low-risk investor, your investment journey will usually become much easier as your time horizon increases.”
There will always be periods when markets decline, he points out. But if your investment timeframe is long enough, these short-term corrections become less important to your final outcome.
“As markets tend to grow over time, this short-term volatility becomes the price of admission for your long-term returns. These short-term declines can also be of benefit to investors who are investing on a monthly or quarterly basis, allowing them to essentially “buy low” in times of market decline, with the expectation of a recovery in the future,” he adds.
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But what to invest in? Right now, with inflation running at about 9 per cent, holding more than emergency money in the bank makes no sense as its value is eroding each year.
“The danger now is having too much cash sitting in the bank for a long period. People might feel safe because it’s not fluctuating, but it’s an illusion and the danger is that a lot of savers will fall victim to this illusion of safety,” says Daniel Moroney, investment strategist with Brewin Dolphin Ireland.
Inflation can also play havoc with fixed income bonds, issued by corporations and governments. To counteract this, some investors will be looking to alternative assets, such as property.
The advantage here is that, in inflationary times, real estate prices typically rise and owners can raise rent, according to Brian Codyre, senior financial planning consultant at Mercer Ireland.
However, there can be disconnects during periods of falling real estate prices and rising inflation; rent increases may come with a lag, and higher inflation may lead to rental cashflows being discounted.
Investing in listed infrastructure is an alternative, with the advantage that infrastructure revenues may be linked to inflation. On the other hand “not all sectors have the pricing power to hedge inflation effectively”, he cautions.
Inflation-linked bonds offer the advantage of having principal and interest payments adjusted to reflect changes in inflation. But such bonds are exposed to interest rate risk and must be held to maturity to hedge perfectly, says Codyre, adding that low or negative interest rates will lock in negative real yields.
Gold has traditionally been seen as a natural hedge. “The key question to ask when considering adding any investment to a diversified portfolio is will it enhance my returns and reduce my risk. Over 20 years, gold does just this,” says Stephen Flood, director of Bullion Services at GoldCore.
He points to research from the World Gold Council that indicates that annualised returns improve and risk is reduced by adding just 5% gold to a portfolio.
“The key and unique difference gold has over all other assets is that it cannot be printed or debased. Central bank manipulation is limited and once you own it, it is no one else’s liability. Be careful though not to buy proxy gold investments such as ETFs or mining shares. Their value is tied not only to the gold price but counterparty risks which, in a recession or depression, may come to the fore,” says Flood.
Be aware too that when it comes to precious metals of all kinds, prices can drop due to technical imbalances, such as where there are more sellers than buyers, says O’Connor.
Floating rate notes are another option, with the advantage that inflation may exert upward pressure on interest rates.
“Variable interest rates tied to a benchmark allow investors to benefit from rising rates, whereas rising rates typically drive down fixed-income prices,” says O’Connor. However, “these notes still experience interest rate risk if the benchmark rate rises less than the market rate. Unpredictable coupon payments can also be an issue, and these notes are of limited use when central banks keep rates below inflation.”
