Monday 7 February 2011

Protect Against Inflation

As a DIY Income Investor, it is obviously important that income should keep pace with inflation (and then some - to increase your overall real wealth). Different asset classes have different inflation-resistance characteristics.

A recent article in Investors Chronicle reviewed the likely performance of different asset classes:
  • Bonds and cash are two asset classes that are almost bound to disappoint in an era of higher inflation, since coupons/interest are fixed at a nominal price and inflation will eat into returns
  • Dividends on shares should be inflation-proof – provided the company passes cost increases onto customers and has the balance sheet to withstand higher interest rates.
  • Property (not an asset class we are keen on at DIY Income Investor) is seen as an effective inflation hedge because landlords can increase rents in line with consumer prices.
  • The key is to look for a real, reliable return on assets rather than easily-eroded capital appreciation

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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