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Inflation & your investments: Should you meddle or sit tight?

Karl 18th May 2023 No Comments

Reading Time: 6 minutes

This investing post is sponsored by Alliance Trust.

The UK has an inflation problem. According to the latest Consumer Price Index, inflation is running at 10.1% and, worryingly, this puts the UK at the top of the inflation tables across Western Europe.

So, with prices rising (and rising), how can UK-based investors protect the value of their wealth?

Should investors look to explore different investing strategies just because inflation is high? Or is it better to sit tight and ride out the current wave? Keep on reading for all of the details, or click on a link to head straight to a section…

What is the situation with inflation right now?

According to the Office for National Statistics, UK inflation for March was 10.1%. While this is lower than the 10.4% figure reported for February, the current double-digit inflation that the country is experiencing is way, way above the Bank of England’s annual 2% target.

While it’s true to say that other countries have been grappling with high inflation recently, the UK is certainly suffering more than most other advanced economies. March’s inflation rate in the Eurozone, for example, was 6.9%, while 5% was the figure for the US. [1]

Of course, the fact that the UK’s inflation rate for March is lower than February’s figure gives us all a bit of hope that inflation has peaked. However, it’s important not to confuse a fall in the inflation rate, with a fall in prices. That’s because a lower inflation rate doesn’t actually mean that prices are actually falling compared to a month ago. It simply means that the rate at which prices are rising by is slowing.

When the UK will finally get to grips with its inflation problem remains to be seen, though some economic groups – such as Capital Economics, and Citigroup – say they expect UK inflation to be between 2% and 4% by the end of the year. [2]

How can inflation impact your wealth?

Whether you’re a saver or an investor, high inflation is bad news. That’s because inflation erodes the value of money – the higher the rate of inflation, the faster your money is losing its value!

Here’s a closer look at how inflation can impact savings & investments…

Let’s assume that inflation remains at 10% for one year. Under such a scenario £10 today will buy us just £9 worth of goods in a year’s time.

In the past, savers could protect themselves from inflation by stashing their cash into a savings account paying an interest rate above the rate of inflation. This is because, from 1950 up until the 2008 financial crisis, savings rates beat inflation 81% of the time.

However, finding an inflation-defying savings account today is pretty much impossible. Take a look at a list of the highest paying savings accounts, for example, and you’ll struggle to find anything paying above 3.71% easy-access right now (as of the time of writing on May 18, 2023). [3]

For those with investments, inflation can have a similarly harmful impact. Say your investments earn you a 5% annual return. If inflation was running at 10% for the year, then your investments wouldn’t have kept pace with inflation. This means the value of your portfolio would be losing value, in real terms.

For those on the fence about whether to save or invest their wealth amid high inflation it’s worth knowing that, in the long run, investing usually beats savings.

According to Alliance Trust (who are sponsoring this article) if you invested £100 in 1982, you would have made 50% more had you invested it in the stock market – and kept it there – rather than keeping it in a savings account. [4] This is why you shouldn’t necessarily rush to move your wealth into savings, just because savings rates are rising.

Inflation & Investments: The bigger picture

It’s worth understanding that high inflation can have a detrimental effect on the wider economy which can directly harm the value of your investments.

One of the reasons for this is that high inflation means businesses typically face higher costs to produce their goods and services. This can squeeze profits, especially if customers are unwilling, or unable to pay higher prices.

Also, high inflation usually leads to a hike in interest rates. This makes borrowing more expensive which can lead to businesses becoming reluctant to take on risk which can hamper growth.

Similarly, higher interest rates can also impact consumer savings habits, as consumers may feel inclined to save rather than spend when savings rates are on the rise. Again, this can negatively impact the wider economy and have a harmful impact on businesses.

Inflation: Should you meddle with your investments?

Hedging your portfolio against inflation is a very difficult thing to do.

Equities, bonds, and a host of other investments are often negatively impacted when inflation is high, so offloading all of your shares to load up on other types of assets may not be particularly effective.

Maintaining a balanced well-diversified portfolio and being patient is likely to be the best way to deal with high inflation, especially in the long-term.

According to research undertaken by Alliance Trust, impatient investors who sold their investments when inflation hit 10% last year ended up costing themselves a collective £2.2 billion! [4]

The same research also revealed how impatient investors who meddle with their investments will typically find themselves worse off than patient investors.

The benefits of being a patient investor

To demonstrate how patience can pay off when it comes to investing, Alliance Trust took a ‘patient’ Stocks & Shares ISA investor and an ‘impatient’ investor and compared their hypothetical returns.

For the sake of the research both of its investors began investing in April 1999 by putting in an equal portion (1/12th) of their ISA allowance every month.

Over the course of 24 years, the ‘patient’ investor from Alliance Trust persevered with their Stocks & Shares ISA portfolio, unfazed by fluctuating inflation and savings rates.

In contrast, Alliance Trust’s ‘impatient’ investor moved their portfolio to a Cash ISA whenever savings rates beat inflation. When savings rates dipped below inflation, they then shifted their wealth to a Stocks & Shares ISA

While it may seem a straightforward investing strategy, Alliance Trust’s research highlighted how this type of decision-making is vulnerable to the ‘Impatience Tax.’ In other words, an investor who meddles with their portfolio too often is likely to end up with lower returns than a more-patient investor.

For example, when looking at the behaviours of the two investors above, Alliance Trust calculated that at the end of its 24 year period its ‘patient’ investor would have ended up with a total of £590,000 – or £190,000 MORE than the ‘impatient’ investor.

On top of this, it’s worth knowing that this figure doesn’t take into account any fees for buying and selling shares. So, it’s actually possible the £190,000 difference between the ‘patient’ and ‘impatient’ investors would be magnified in the real world.

Clearly, when it comes to investing, patience is certainly a virtue! To read more, take a look at Alliance Trust’s ‘Are you profiting from patience?’ report.

Investing with Alliance Trust

We’re happy to say that we’ve put this article together in partnership with Alliance Trust who have practised a long-term investing approach since 1888.

Working with experienced fund managers, Alliance Trust invests in shares globally and has competitive fees for the industry. Alliance Trusts uses WTW who are a well-known investment manager and adviser for large pensions schemes.

If you’re not familiar with what an investment trust is, it’s essentially a form of investment fund where a fund manager pools capital from a number of investors.

Investment Trust shares are traded on stock exchanges, and the goal of an investment trust fund manager is to beat average market returns. Investment Trusts typically invest in a diverse range of assets, such as shares, bonds, and property, although Alliance Trust specialises in shares.

It’s worth knowing that Investment Trusts are ‘close ended’. This means that fund managers have a fixed amount of capital to invest. This is one big advantage that Investment Trusts have over other types of investing, as fund managers know exactly how much money they have to play with.

Unlike open-ended funds, Investment Trusts are also allowed to keep 15% of the income they earn each year to boost dividends during challenging years. This is why many investment trusts have excellent dividend growth track records.

If you’re interested in earning dividends, then it’s worth bearing in mind that Alliance Trust has paid out 56 consecutive years of rising dividends. The firm also says it is committed to extending this track record into the future.

Investment Trusts can be held within a Stocks and Shares ISA. To learn more about the benefits of this, take a look at our article that explores tax-efficient investing through an Investment Trust.

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Disclaimer: MoneyMagpie is not a licensed financial advisor. Information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. 


[1] FT: Stubborn UK inflation rate is forecast to lose energy in months ahead, April 2023
[2] FT: UK inflation to return to 2% by autumn, Citigroup forecasts , February 2023
[3] MoneyFacts: Savings accounts , May 2023
[4] Alliance Trust. The Profit from Patience ISA Report, January 2023


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Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

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