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Prospect finance report: How do you solve a problem like inflation?

An introduction to the pieces in Prospect's new supplement

By Jay Elwes  

Scroll down to see all the pieces in Prospect’s new report

The term “conventional wisdom” is often attributed to Galbraith, a term he used to denote “the ideas which are esteemed at any time for their acceptability.” One such idea is that quantitative easing (QE) has caused a huge spike in the value of UK assets, not least housing.

But as Andy Davis points out here, once you strip out the effects of inflation, that conventional wisdom looks quite wrong. Research shows that, between 2007 and 2017, once the effects of inflation are stripped out, house prices fell in 58 per cent of council wards, despite QE.

Inflation distorts our perception of value and of returns on investment. So now that inflation stands at 3 per cent, put there by the sudden dip in sterling after the Brexit vote, and central banks including the Bank of England are edging towards further interest rate rises, how can investors get returns that beat inflation? One answer is to invest in so-called real assets, such as property and infrastructure. But the message overall is that if you want the returns at a time like this, you’ll need to get comfortable with the idea of taking on more risk.

One new and pretty risky avenue to explore is cryptocurrency. The ups and downs of Bitcoin have been fairly hair-raising. But in the long term, the ability to buy and hold cryptocurrencies and other types of value store will become increasingly useful and attractive for the financially-minded as well as people who just take an interest in what’s new.

One firm has come up with an idea that’s both old and new—allowing customers to use gold as the basis for transactions. It’s eye-catching, and especially significant nowadays for the way it allows you to dodge the inflationary drag on the pound. Pile into gold and that 3 per cent problem vanishes, though of course you open yourself up to other potential unwelcome pressures.

Another option is to invest using an online “robo-investment” site. Though it sounds like something from a poor sci-fi movie, these are actually very conservative systems. A survey in 2016 found that in the ten preceding years, 86 per cent of funds had underperformed the market—in other words, if you had simply bought a spread of shares picked randomly from the FTSE 100 and held it for that decade, you would have beaten 86 per cent of Europe’s fund managers.

Noticing this, there is now a burgeoning industry in simply buying into an index and holding it. What’s more, you don’t need big-time fund managers to buy and sell on your behalf. A computer will do. It’s boring, it’s safe—and at a time like this, boring and safe are pretty good.

How investors can beat the inflation blues

How to invest in cryptocurrency

Why gold is still the ultimate asset

How to do something innovative with your ISA

In the future, who will control our money?

How computers could replace fund managers

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