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Wealth Preservation: Facing the rise of inflation and market volatility.

No matter which market we choose to invest in, whether at size, for family, for business, preservation of capital is always at the back of mind – as well as the prospect of accumulation.

The decision-making process around making any key investment decision should not come about without the necessary due diligence of measuring risk, opportunity (lost and gained), liquidity and longevity.

Historically, there are many examples of major investment decisions, both bold and risk averse, which have lasted the test of time and prevailing market. 19th Century industrialist, William H. Vanderbilt, who had inherited his fathers $100m fortune, went on to double that inheritance over his remaining lifetime, said: “Any fool can make a fortune. It takes a man of brains to hold onto it.”

We can study a plethora of reports across the wealth management industry that suggest the traditional investment strategy that 70/30 equities to bonds lacks diversity or even, the safety to secure the goal of wealth preservation, whilst attaining growth against a low inflationary background of the last decade. Traditional thinking – which, with the onset of pandemic-induced inflation, volatility and economic uncertainty – now run rough shod over any well-founded investment strategy.

The task of pivoting an investment strategy in this environment can be daunting. More so, to achieve a position of relative preservation, even more so and such a goal is more important today than ever before. Covid-19 has generated a volatile bull market for equities and commodities, creating ‘Tesla Millionaires’ yet also causing irrecoverable losses – something which must be avoided at all costs when investing with future generations in mind.  Traditional bonds are generating lower returns, with yields dropping and central banks refusing to raise interest rates, making government and corporate bonds become less valuable in traditional portfolios.  Yet, the main reason a change in investment strategies is needed, is a basic economic phenomenon that has lacked relevance in the developed world since the 1980’s: inflation.

Since the early 90’s inflation in the United Kingdom has maintained relatively stable, closely under or above the central banks ‘magic number’ of 2%, considered the optimal target for sustainable economic growth. Covid-19 disrupted the world as we know it and continues to do so.  Due to price freezes in the early stages, inflation remained low, but moving into 2021 with a rebounding economy, coupled with natural resources shortages and a global supply chain disruption, inflation is rising.

The Bank of England estimates a 5% rate of inflation through the winter period, peaking at around 6% by April 2022.  Similar figures are appearing in the USA and other developed nations. While many economists called this figure ‘transitory’, the Bank of England has just raised interest rates from 0.1% to 0.25% to curb inflation and economists are now predicting further incremental rate hikes from central banks globally in 2022.

If these rate hikes are not sufficient to counter these strong inflationary pressures, then investors with inflexible strategies may find that their wealth is not preserved, and the real value of their money will be diluted.  Further concerns such as an upcoming bearish stock market and expected taxation hikes, can only continue to hurt portfolios which are not significantly diversified to achieve optimal growth and preservation.

Considering the UK markets outlook, it is high time to shift investment strategies.

A report by Goldman Sachs on the most prosperous family offices shows that a highly diversified portfolio is the correct way to achieve growth and preservation goals.  Such a portfolio is not simply comprised of different stocks and bond, it should also hold cash in multiple currencies, and investments in private equity, real estate, and venture capital; across developed and developing economies.  An investment strategy with such a level of diversification, should help investors hedge their hard-earned wealth for their personal enjoyment, and the security of future generations.

Yet, different investments don’t hold the same value.

Cash reserves over the level of required liquidity for current consumption may not be prudent as the inflammatory pressures will diminish its value.  Investing in venture capital may also be too volatile, as the rule of thumb holds that one out of ten start-ups will only generate considerable returns, which may not offset the losses caused by other investments.

On the other hand, real estate is a safe and diversified investment to hold.  

As a direct investment or through a specialised group, the market for real estate is constantly growing, especially in a metropolitan city like London.  Although interest rates for mortgages have risen, as lenders consider the Bank of England will raise their rates in the following years, inflation seems to be outpacing the hikes, thus making real estate a considerable investment for long-term wealth preservation.  When it comes to equities, long-term investments in ETF’s and traditionally well-valued companies as well as asset managers, are also an optimal investment strategy, as long-term growth and stability can almost be assured.

Finally, investing in bonds today raises questions. 

A traditional belief in the wealth management industry is that bonds must be held to hedge the volatility of the stock market.  Yet, as a bet against inflation, government and other low yielding bonds are not an interesting or safe investment opportunity.  Inflation-fixed bonds are becoming a more attractive investment.  Yet, the cherry on the top as a hedge and safe investment are high yielding bonds.  Although they often require a high-value long term lock in process, it is currently, the investment tool most worth considering for riding out inflationary and other market pressures, while preserving and growing wealth.

Investment strategies with wealth preservation in mind require flexibility to adapt to market volatility and external pressures. 

The period between the 2008 financial crisis and the beginning of the Covid-19 pandemic presented stability and growth opportunities where a classical portfolio of equities and government bonds were sufficient to preserve wealth.  The world as we know it has changed, and with it, investment strategies need to change too.  Further diversification into funds, high-yielding bonds, real estate and emerging markets should prove successful in fighting inflationary pressures, market volatility, and other changes to come.



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