Investment Profiles

Investment Assets tend to react similarly in different market conditions. Individual asset classes are also generally governed by the same rules and regulations. There are four basic asset classes: Cash, Bonds, Property and Equities are all asset classes and the way you spread your money between asset classes is your asset allocation. A risky asset allocation consists mainly of shares and a defensive allocation consists more of bonds, property and cash.

Risk Rebalancing

Academic studies as well as real-world experience have shown that asset allocation is the key factor in long-term investment performance. By choosing the correct mix of stocks, bonds and other asset classes, investors can create the portfolios that best match their financial goals and attitude to risk. Asset allocation is a dynamic process. However over time, market forces will cause the composition of a portfolio to change in ways that may increase risk or lower returns. Investors need to decide whether and when to restore their original target allocations. This process is known as portfolio rebalancing.

Everyday Inflation

It should be remembered that growth needs to be sufficient to counteract the effects of inflation.
Inflation is the rate of change of prices for goods and services. It influences the interest rate on savings, mortgages and also affects the level of state pensions and benefits.

Everyday Goods Price in 1985 Price in 2015 % Change
Draught lager, per pint 80p £3.35 318%
Bread, white loaf, sliced 50p £1.35 170%
Milk, pasteurised, per pint 20p 49p 145%
Butter, per 250g 50p £1.38 176%
Sugar, per kg 47p 98p 108%
Coffee, instant, per 100 £1.20 £2.79 132%
Eggs, per dozen 73p £2.85 290%
Funeral Costs £610 £3,609 491%

The obvious impact of inflation on your savings is that the purchasing power is eroded. This means that if you stash £100 under the mattress today and inflation is 3% per year you would need £103 to buy the same amount of goods a year later. When you extend this to 10 years you might think that it would mean that you would need £130 to buy the same amount of goods but because of the effects of compounding you would actually need £134.39.
Unfortunately, compound inflation is just like compound interest working against you. When you look at the effects of 3% inflation on your savings over 25 years we find that prices will have more than doubled and you will need £209.38 to buy the same basket of goods that £100 would buy 25 years earlier.