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What investments are best in high inflation?

25 February 2021

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Question by Alex

I've managed to save up a pot of approx £5,000 during the pandemic and am looking to invest it in a stocks and shares ISA – I have recently set up an account with Trading212 and am looking to invest both in specific stocks as well as funds. I subscribe to various investment magazines that suggest that inflation is going to rise in the coming months / years.

What are the best investments to make now that will do well in a period of high inflation? And on the flip-side – what should be avoided?

Thanks


Answered by Dennis Hall

Hi Alex,

Your question is a good one from several different angles. After 35 years working in financial services, I know that nothing is really ‘free’ so how do Trading212 make their money – because it sounds too good to be true? Doing a bit of digging I learn that they make their money from the spreads between the buying (bid) and selling (offer) prices of shares. To create sufficient income for them you’re likely to be sold securities close to the highest offer price, and they’ll buy back securities close to the lowest bid price, and on some shares those spreads can be very wide. If you’re a buy-and-hold investor it probably doesn’t matter, but if you’re a frequent trader it is a significant hurdle to get over. It’s not a criticism of Trading212, but something to be aware of.

On the topic of inflation, for every economist who says higher inflation is on the way I can find another who says the opposite. They’ve been talking about steeper inflation since the credit crisis of 2008, and apart from a short blip in 2011 when it hit 5% it has remained steadfastly low. I don’t believe in forecasting, and there’s no evidence to suggest we are any good at it, so I won’t be betting my savings on inflation rising. Instead, I look for diversification both globally and across all stocks to give me a decent long-term return. If I want to take more risk to get a better return, I invest in smaller companies. Having said all of that if you’re wedded to the idea of investments to buy or avoid in a period of high inflation then look to invest in those companies that drive inflation the most. Food production, commodities and energy tend to be big inflation drivers so think about fertiliser manufacturers, energy companies and mining companies. Avoid luxury goods, airlines and hotel groups.

Answered by

Dennis Hall

Chartered Financial Planner

I’ve only ever had two careers, Royal Marines Commando and Financial Planner. The physical requirements between the two roles are a world apart, but what I learned in the Marines about high standards, ethical behaviour and purposefully serving others has served me well as a financial planner.