How to ensure your savings beat inflation in 3 charts

Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

The findings suggest that, for someone wanting to grow the value of their money in real, inflation-adjusted terms over the long-term, investing in stocks and shares is likely to give them a much better chance of doing so than holding cash savings. What’s more, the longer you hold those investments, the greater your chances are of beating inflation.

This is important for savers of all ages - but especially for those in their 50s and 60s. As people near retirement, they often look to derisk their portfolios by moving from stocks into lower-risk, lower-return assets such as bonds or cash. In some circumstances, for example if you’re looking to buy an annuity with that money, that is the right decision.

However, for retirees who have years to live and need to ensure the value of their investment pot keeps up with inflation, these numbers show there can be risks involved with moving into cash and allowing the value of their savings to fall in real terms.

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The stunning growth in UK house prices in recent decades has left many people with the impression that property is the ultimate inflation-beating asset class. However, data from the past 10 years suggests this may be a false impression.

We looked at the real returns - the returns after inflation - of various asset classes and found that property has failed to beat inflation over the past three and five years. Over the past three years, the value of UK residential property has fallen by 9% when inflation has been accounted for. 

Only when you look at a 10-year period does property deliver inflation-beating returns, with a real return of 6%. 

Of course, property is not just an investment. For the majority of us, it is the roof over our heads. However, there are around 2.82 million private landlords in the UK,³ plus many people who follow the strategy of “buy the biggest house possible and hope to benefit from house price growth” as part of their retirement planning. It is therefore important to scrutinise whether property value growth has lived up to its reputation and how it measures up to other assets.

Global government bonds performed similarly poorly, delivering a negative return after inflation over the past three, five and 10 years, as did global corporate bonds. The latter failed to deliver a positive real return over three and five years but did manage to achieve a small real return of 8% after 10 years.

The only asset classes to beat inflation consistently were global stocks and gold. Global stock markets delivered a real return, after inflation, of 26% over three years, 45% over five years and 132% over 10 years.

Gold performed slightly better over three and 10 years (with a real return of 49% and 134%) but worse over the past five years (25%).

People often say that gold is a good hedge against inflation as it has a limited supply and is believed to preserve its value over time. This can be true in times of extreme or unexpected inflation, for example in the 1970s when trust in central bank currencies collapsed. However, there have also been periods of moderate, persistent inflation where gold has fallen in value. The moments when gold comes into its own are usually times of crisis, when investors flock to it as a safe haven.

Some investors will not be comfortable with the sharp volatility that comes from investing in gold.

• Read: What is the best way to invest in gold - ETFs or gold miners?

Which stock market has been best at beating inflation?

Global stock markets are a broad church, and some markets have done much better than others at beating inflation.

Over all three time periods, US stocks have delivered the best after-inflation returns: 30% over three years, 63% over five, and 205% over 10 years.

European stocks were next best over a 10-year period, delivering a real return of 74%, followed by emerging markets (55%), UK (41%) and finally China (25%).

On the fixed-income side, UK and US government bonds have performed similarly poorly over three and five years. Over 10 years, US bonds have done slightly better, delivering a real return of -5% vs -13%.

However, past performance is no guarantee of the future and there are question marks over whether the US’s exceptional stock market outperformance can continue. Therefore, investors wanting to beat inflation may prefer to take a diversified approach and simply invest in stock markets globally.

Is investing right for you?

For most of us, long-term investing could be the secret sauce that helps to ensure we reach our financial goals. However, in the short-term, if you’re not sure what to do with your excess savings, it’s important to consider whether investing is right at that time.

Stock markets go up and down and, if you don’t already have cash savings equivalent to 3-6 months of your usual spending easily accessible, it’s vital that you focus on building up that cash buffer before you think about investing.

But for those who do have that safety net, holding too much cash over and above that can really hamper your chances of growing the value of your money in real terms and potentially delay you from meeting those life goals you’re saving for.

For more on inflation and how it’s the secret threat to retirement plans - watch this episode of the Personal Investor podcast.

Got a burning question you want to ask? Why not drop us a line. Click here to ask your question.

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• Read: When might the FTSE 100 hit 10,000?

Source:

¹ Returns of cash savings modelling using a combination of Libor and Sonia. Inflation modelled using the Consumer Price Index (CPI). Source: LSEG Workspace
² UK landlord statistics 2024 - facts and stats report | confused.com