Adapting Plans: Navigating Uncertainty

My previous article highlighted the importance of sticking to a long-term plan, which is tried and tested in times of uncertainty. This ‘plan’ should be robust enough to see you through the darker days, as market falls should be factored into long-term thinking. However, there are certain events that you cannot exactly predict, the main one being inflation. History tells us that inflation averages out somewhere around 3% pa in the UK, which is the long-term target of the Bank of England (BoE).

When inflation exceeds this average, we all feel the pinch, as rarely do wages keep up with the 10% we are seeing this year. This causes us to spend less on luxury items as we cover the increase in household bills.

As the BoE increases interest rates to help curb inflation by encouraging us to save more, we see our cash work harder for us. However, as we spend more to live it reduces our ability to save!

Over 12 months, if inflation has been at 10% and your investment portfolio has fallen by 10%, then the real (paper) value of your investment has fallen by 20% in that period. Whereas if you hold a cash savings account at 4% interest with inflation at 10%, the real loss has only been 6%.

So, should we be reducing our contributions into vehicles such as pensions and Stocks ISAs and re-directing those into cash savings for higher interest rates? This depends on where you are in life. For those who are at least 10 years off retiring or drawing from these pots, continuing to invest in the stock market is important at this stage. As markets fall, they also provide a good buying opportunity, and your regular contributions will purchase cheap unit/share prices. In later years when markets recover, those cheap units you purchased in the harder times will help your retirement pot appreciate rapidly.

If you have less capacity for risk and are at a different stage of life with surplus cash savings, taking advantage of these higher interest rates is a good way to diversify your portfolio and add some degree of short-term certainty, however.

Yes, having lots of cash over the long term is not advisable if inflation and interest rates remain where they should be. However, using this period of rising interest rates to get more on your savings is important to steady the ship and reduce the effects of high inflation when investments are falling in value. It also provides quick access and liquidity for when further buying opportunities present themselves in the markets later on.

In terms of taking money out of stocks and shares to put into cash, this is a difficult thing to get right and is not usually advisable unless you require that money for specific purposes. Cashing in an investment when markets are down could mean crystallising a loss and that paper valuation suddenly becomes a real figure. If replacing stocks with cash makes you feel more secure, then perhaps you were not aligned to the correct risk approach within your investment portfolio in the first place.

Lets also not forget the most important thing – do not be afraid of making tweaks along the way if it means keeping or improving your standard of living today. With the bad news circulating around the world, it is important that you take time to find a balance and enjoy life now, rather than over-evaluating the future. A professional adviser should help you plan long term whilst allowing you to appreciate life now.

Please be aware that the value of investments linked to the stock market and the income from them, may rise or fall depending on market conditions and that you may not always recoup your initial investment. In addition past performance should not be seen as an indication of future returns.

Kellands (Hale) Limited is authorised and regulated by the Financial Conduct Authority. FCA Firm Reference No. 193498