Is Inflation Affecting Investors' Plans?

UK investors could be tempted to cut back or stop contributions in response to the cost of living crisis. At the moment, they are not panicking

James Gard 21 February, 2022 | 11:58AM
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People pushing coins uphill

Every month sees another rise in inflation, and there are fears that the increase in the cost of living could hit 7% in the next few months.

As inflation is now rising much faster than wages, this means that people need to make tough decisions about how to spend their money this year. Budgets are tight and are likely to get tighter this year as taxes and energy bills rise. As many people invest monthly amounts via direct debit, could the annual ISA be one of the first places people look for a quick win? The results of recent surveys suggest that investors are reacting in different ways to the cost of living squeeze.

Investment platform Hargreaves recently surveyed some of its customers and the results suggest that people so far are not panicking: 14% said rising inflation means they will invest more to build up more of a cushion, 6% expected to cut their contributions to pension or investments, and just 10% are planning to sell outright.

“Inflation is more likely to make investors put more money away for the future than it is to get them to sell up, or cut contributions: one in seven say they’ll boost savings. This is a very sensible option,” says Sarah Coles, senior personal finance analyst at Hargreaves Lansdown.

Looking at the 6% of those surveyed who plan to cut back on contributions, this is split evenly between those reducing their pension and investment savings. Coles argues that this isn’t the end of the world: “If you upped your monthly payments to take account of lockdown savings at a time when prices were lower, this may be a perfectly sensible readjustment.”

It's better to adjust a ISA direct debit than to miss a debt payment or a bill, she says. 

And she says that a few months of reduced pension contributions won’t make a huge difference in the long run. You could always revisit the decision in a few months if the squeeze in the cost of living starts to ease.

However, investors need to weigh up the pros and cons of making changes to ISAs or pensions, because the latter attract tax relief and employer contributions. From an admin perspective, it may be easier to adjust your ISA contributions as some employers only allow employees to make changes to their payment levels at certain times of the year.

Younger Investors Being More Proactive

Research conducted by Janus Henderson Investment Trusts suggests that age is a large factor in how investors see inflation as a threat. Asked if they expected inflation to have a negative impact on their investments, 38% of those surveyed over 55 said yes, whereas 42% of younger investors agreed.

Of the older age group, just 22% have made changes to their investment strategy in response to rising inflation – and almost half of this cohort have no plans to do so. Among younger investors, however, 50% have already made changes and a further 32% are planning to.

“Younger investors, who have more flexibility and can take a longer-term view, were found to have been more proactive in making changes to their investments in direct response to the present circumstances,” James de Sausmarez, director and head of investment trusts at Janus Henderson.

For investors worried about investing in these highly uncertain times, the ISA’s flexibility has some advantages. Emma-Lou Montgomery, associate director for Personal Investing at Fidelity International, points out that you can put aside as little a £25 a month. That's not going to fill up the £20,000 allowance over a year, but could be an easy way to start the investing habit.

Montgomery also says that low-cost ETFs or index funds could be an option for those keeping a close eye on their monthly outgoings. “Costs can be much lower than with active funds, but on the other hand they’ll match rather than outperform the market,” she says.

Regular saving also removes the temptation to time the market, and it’s automatic, so you may not notice that £25 going out every month among mobile phone bills, subscriptions etc.

ISA Demographics

What do we make of these findings? One can make assumptions about the typical ISA customer and they are probably wealthier than the average person and more likely to be older, with assets and income to fall back on, such as pensions, rental income etc. However, they are more likely to have an income focus among their investments, which means dividend-producing shares will have to work harder this year to keep up with or beat inflation.

“The fact that inflation encourages investors to put more away, rather than plunder their investments, owes much to the fact that many investors are on higher incomes,” says Hargreaves Lansdown’s Coles.

This may explain the findings of the Janus Henderson research: older investors may be worried about inflation, but have more of a safety net or alternative income streams to mitigate that. Or given their experience of previous inflationary periods, the 1970s and early 1990s in particular, they are able to be more sanguine and leave their investments in place?

While many more young people have started investing in recent years, as the most popular platforms report, they may find it harder to hold on to them – or persuade them to use their entire ISA allowance – in a sustained cost of living crisis and/or a bear market.

Also, these surveys are a snapshot in time and the results could change in six months to a year depending on a number of factors, such as energy bills, how the economy is performing generally and what levels stock markets are at. A sustained period of high inflation is likely to test investors’ patience the longer it goes on.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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James Gard  is content editor for Morningstar.co.uk