A dangerous mix is brewing

There is so much going on in the UK at the moment it’s hard to know quite what to comment on first. But if you want to look through the noise to the things that should matter to investors, you should concentrate on UK debt levels, inflation and interest rates. John looks at all this in some detail in this week’s cover story, but the key point is that almost without exception all UK politicians now believe the UK is “tired of austerity” and wants to see a sharp rise in UK government spending.

We don’t know for sure why they believe this, given that working hard to balance the books fast was not one of the options given to the UK voter in the last election. Osborne never actually produced real spending cuts and May’s manifesto pretty much abandoned the idea that it was worth the bother. Still, there it is. That’s what they believe.

Expect government spending to rise quite fast if the UK sticks with May and very, very fast if she doesn’t last the summer. And if government spending rises fast, you should also expect inflation to keep rising at a faster pace than poor Mark Carney would like (being a central banker is even harder than usual when all politicians appear to be mad).

You could argue that all the uncertainty makes it unlikely that the Bank of England will raise rates, even with inflation picking up. However, not only is it going to be quite hard for Carney to justify holding back if it goes over 3% (his mandate is inflation at 2%), but rates aren’t always just about the views of the monetary policy committee. As Peter Warburton of Economic Perspectives says, “holders of conventional gilts should beware the risk of foreign outflows if UK inflation reaches towards 3.5%”.

This is a dangerous mix, so it is time to be rather more cautious with your investments than usual and to be sure you are well diversified. With that in mind, I’d be tempted to take some profits on anything that has done well and buy into some of the better multi-asset funds out there. I mentioned RIT on the website a few days ago as a long-term favourite.

Another friend in a crisis has always been Personal Assets Trust, as has its sibling the Trojan Fund. Both are managed by Troy Asset Management. Then there is the Baillie Gifford Managed Fund, which is top-performing, hugely diversified and very cheap, as well as the McInroy & Wood MW Balanced Fund, which is more expensive but has a good long-term record as well.

One thing the history of markets has taught us all is that while focusing your investments in a few areas can be a good way to get make a lot of money – if you get it right – the only way to be sure you will stay rich over the long term is to spread that money around. Concentrate to get rich. Diversify to stay rich.