Inflation: how to protect your portfolio

Inflation: how to protect your portfolio
If inflation does kick off, then there is one place you want to be: equities.

By Emma SimonLast Updated: 9:35PM GMT 27 Mar 2009

Mr Haynes at Whitechurch said that those taking a medium- to long-term view should not ignore the stock market.

"I particularly favour equity income funds that invest in companies that can pay and grow dividends above the rate of inflation," he added. His preferred choice is Artemis Income or Newton Higher Income.

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Those on a fixed income, such as pensioners, should take care to hedge against inflation, as it can seriously erode future spending power.

It is possible to buy index-linked gilts and index-linked annuities, which typically rise in line with RPI. However, there is often a premium to pay for buying this protection which can leave investors out of pocket if inflation falls.

Interest rates tend to rise in periods of inflation. On the face of it this is good for those with cash savings. But remember, you want to look at real returns – the interest you are getting on your savings, over and above inflation.

A return of 6pc may sound a lot healthier than the 1pc people are typically getting paid today, but if RPI is significantly higher, you may be little better off.

Mr Haynes added: "It may be worth considering commercial property funds again as a hedge against inflation.

"A lot of leases have upwards-only rent review and will increase rents in line with RPI. There could be further pain in the short term as the economic environment worsens, but if inflation rears its head it may be time to revisit these funds."

Hedging your bets

Paradoxically there is one asset that advisers recommend as a hedge against both inflation and deflation: gold. Mr Haynes explains: "Many investors believe gold is a good, safe bet in times of economic turmoil and falling interest rates. However, due to its intrinsic value and limited supply, gold has the ability to retain its real value over time, making it a potential hedge against inflation."

Ms Schooling agrees. "When prices are unstable people feel safer holding gold. Historically it has managed to keep its head in times of economic turmoil."

So whether we enter a period of deflationary gloom, or prices start to rise out of control, gold should be a safe bet. However, there is one word of warning.

Once we come out of the recession and the economic picture becomes more benign, gold is bound to lose is lustre. Investors are unlikely to want such a safe investment, and a change of sentiment could cause prices to dip sharply.

Those wanting exposure to gold can either buy gold bullion, invest in an exchange-traded fund that tracks the gold price, or buy into a fund such as Black Rock Gold and General, which invest in mining and other gold-related shares.

Mr Collins added: "Whichever wins through it's clear we're in for a difficult and uncertain time that will result in higher levels of volatility in financial markets.

"It won't be enough to simply buy an asset class to protect you from the ravages of inflation or deflation." Investors need to be nimble: diversification will remain key, as will keeping an active eye on your investments.

http://www.telegraph.co.uk/finance/personalfinance/investing/5063296/Inflation-how-to-protect-your-portfolio.html