Making money is about to get much harder

Soaring inflation, geopolitical risk, bubbly stockmarkets - getting a return on your investment is going to get much more difficult – but not impossible, says Merryn Somerset Webb.

Gold bars
Gold: a millennia-long record of hedging against inflation
(Image credit: © Getty Images/iStockphoto)

I’ve had a letter from my auto-enrolment pension provider, Aviva. It tells me that my pension is worth £19,574.25. That’s nice (I have savings with other providers). But it almost immediately gets less nice. Aviva also tells me that “at retirement” my pension “could be worth £18,800.” I read that a few times to make sure I had not misunderstood. I had not: Aviva reckons that by the time I am 65, it will have lost me £600.

This is where it gets interesting. On page six of the confusing documentation, Aviva adds a little meat to the bones of all this. It turns out that £18,800 is not the nominal amount of money it expects me to have in 15 years’ time. It is the “real” amount. Aviva has “made an allowance for future inflation” to give me an idea of how much I may be able to buy with the income from the £18,800 (£42 a month should you be interested…) if I received it today.

This isn’t a bad way to do it. But it does come with two problems: almost no one will read to page six; and Aviva, one of the UK’s largest money managers, does not trust itself to be capable of investing my money so as to preserve my purchasing power over the long term (I think we can all agree that in stockmarket terms 15 years is the long term). I mentioned last week that this is no time for financial passivity. I think this rather proves the point. I’m going to have to move.

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All that said, it won’t be as easy to make money over the next 15 years as it has over the last 15. In this week's magazine, John looks at investing guru Jeremy Grantham’s ideas on this (listen to Grantham discuss them on the MoneyWeek Podcast. He is sure that the US at least is in what he calls a “super bubble” – one that, thanks to soaring inflation (our cover story this week explains part of the reason why); the high risk that this will lead to a wage/price spiral (workers demand higher wages to compensate for rising prices, which drives prices even higher); the return of geopolitical risk; and the recognition that while a fun growth story is nice, cash is nicer; is now starting to burst. This week almost every big fund management firm announced it is time to buy the dip. If Grantham is right, it is not – in the US at least.

Insuring against all this is tough (perhaps Aviva is just rather more honest than other professional investors). But it isn’t necessarily impossible. Goldman Sachs suggested this week that we buy gold again, as a hedge against “bad inflation.” Most MoneyWeek readers will, I think, have some gold as a hedge. It hasn’t covered itself in glory so far this cycle, but it is still the one asset we have easy access to with a multi-millennia record of protecting against inflation. So it is worth holding.

Silver might be too (for more, listen to this week’s podcast with Julian Brigden). We’d say the same for profitable companies with good records of paying rising dividends. The latest Link Dividend Monitor reports that UK payouts rose by 46.1% last year, led by a surge in special dividends from miners. Link is not convinced this will continue, but given the supply and demand dynamics in many commodity markets, we wouldn’t be so sure. The same goes for oil companies: with oil at a seven-year high they should soon be rolling around in cash, some of which will end up in shareholders’ pockets. Buy good companies at the right price today, and it seems unlikely you will be out of pocket in 15 years.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.