Inflation levels around the world are soaring as energy and food prices spike due to the combined pressures of the war in ukraine and global efforts to recover from the impact of covid-19. In an attempt to control inflation, which is dangerous ifleft unchecked, governments and banks worldwide are raising interest rates to try and put a brake on spending. But despite the measures being implemented, it's clear that the world is experiencing a global slow-down, and in some countries, recession is looming (recession is generally defined as a fall in gross domestic product over two successive quarters).
Traditionally, higher interest rates have rewarded savers, who have long suffered from low returns on their money. However, rampant inflation swallows any of the increases that savers might have expected — with price rises on energy bills, food, and a range of other commodities coming in as significantly greater than any of the interest rates on savings accounts offered by banks.
So just how can you make your money work for you in periods of high inflation, and capitalize on the downturn?
Our experience suggests that while market downturns can appear quite scary, they often present a great opportunity for the savvy investor. Those looking to make the most of their savings and income could consider invested funds, which are actively traded with the aim to offer marketbeating returns. Holding cash now in low-return interest accounts means that savers will lose money over time, so those who are able to take a longer-term outlook (over at least five years) should consider investing, as opposed to saving.
Those with funds already invested might panic when they see their value drop, but it's critical that, depending on your individual circumstances, you hold your position. Markets operate in cycles, and in recent history have always come back stronger over time.
Property could also be a good bet. While property prices in 2023 might be forecast to drop back to levels seen in early 2022, markets always return to equilibrium and a shortage of properties in key markets will continue to drive capital growth.
It's also a great time to consider investing in stocks and shares that may be at the bottom of the cycle. If you are considering investing a lump sum or have savings that aren't getting the interest rates you would like, talk to your financial adviser to see how you can really make the most of the current economic situation.
This article originally ran in the February 2023 issue of Dockwalk.