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Inflation is a terrible parasite. It takes a real toll on your hard-earned money over years or even decades. The main reason is one of the reasons why I focus on ways to protect capital against inflation.
Private and commercial banking firm Arbuthnot Latham offers tips on how people can try to protect capital in uncertain times. A couple that caught my eye when it comes to my own portfolio.
Difference
One of those activities is making a difference. In other words, as an investor it’s about not putting all your eggs in one basket.
Arbuthnot Latham points out,By investing in a mixed asset portfolio, you gain exposure to underlying investments that react differently to external factors.He said.
I try to follow that approach myself. I think diversification, even within a single asset class, can be useful when trying to preserve capital.
Is it protective or not?
For example, I own several shares of tobacco other And British American Tobacco. This business sector is often seen as defensive. In other words, even when the economy is in a bad state, since customers tend to buy tobacco products, the income and profits of such firms are expected to be good. That may explain why British American shares are up 32% over the past year.
Then no share is risk free. One risk for tobacco stocks is a decline in cigarette consumption in developed markets such as the US. Tobacco companies have tried to manage this by developing non-cigarette businesses. But Altria has written more about the value of the investment in the vaping brand Jul this year.
Altria’s stock price is down 9% from a year ago. Even a sector considered to be safe like tobacco can see share prices fall in a weak economy. That’s why I diversify my stock portfolio to make sure it covers a wide range of business areas.
Tax efficiency
Another way to try and protect capital, identified by Arbuthnot Latham, is to invest in tax-efficient ways.
This will mean different things to different people. But for me, investing in a Stocks and Shares ISA is one way I try to manage my investments in a tax-efficient way.
That means I’m able to try and target both dividends and capital growth, but I’m minimizing the potential tax impact of those investments if I make them outside of an ISA.
Please note that tax treatment depends on each customer’s individual circumstances and may change in the future. The content in this article is provided for informational purposes only. It is not intended to be or constitutes tax advice of any kind. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decision.
Why protect capital?
In real terms, the value of money is not constant.
Currently, high inflation is eating it up day by day. This is true for unspent money sitting in my ISA. But it also affects my share price. Last month, for example, Jupiter It paid me an interim dividend of 7.9p for every share I held in the asset manager. This amount is the same as last year’s interim dividend – but the 7.9p today is not worth the purchase price of a year ago.
That’s why I look for ways to try and protect capital in your investments. Hopefully, putting them into practice will help my finances in times of high inflation.