what can you do to preserve capital these days

Money performs two roles in the economy, One is to provide a medium of exchange and intermediation. If I have a goat to sell and exchange it for pounds, I can buy a loaf of bread from the baker even if he doesn’t need a small piece of a goat at the time :)

For most people, who earn money, and (ideally) spend what they earn but no more on their lifestyle, that is all they need money to do for them. It lets them transfer the value they gain from selling their services to their employer to paying out to whatever they need to support their lifestyle.

However, since I am trying to save to give to my future self, I need money to perform a second role. That role is one which the Great British Pound Sterling seems ill-suited to perform for me. That second role of money is as a store of value. If I forego a £100 worth of bread now, I would like some mechanism to be able to buy the same amount of bread in the future.

In theoretical terms I did quite well last year with global index ETFs, even after the hammering of recent weeks I am still about 20% up, in pound terms. However, against that I have to allow for the corrosive effects of inflation, currently at 5% and rising. I experience RPI-X as I have no significant housing costs being mortgage-free, so I experience higher inflation, as housing costs are artifically depressed by Government action on interest rates. Fuel and food in particular have gone up seriously over the last year.

I chose L&G’s global ETF in an attempt to diversify out of the UK, for in Britain we have been living beyond our means for almost a decade and these chickens seem to be coming back to roost.

RPI - 5% and rising

RPI-X - 5% and rising

However, we seem to be entering a dangerous period of probable monetary inflation, as a result of printing money, euphemistically called quantitative easing round these parts. That looks like being coupled with a nasty dose of asset deflation as the stock market rally falters or starts trading sideways, for the reason that there don’t seem to be any good underlying reasons for the rally to continue, other than providing a home to park some of that government-issued money.

So the question is, really, what can a chap do to store value? What I need is real stuff that holds its value, preferably something which can’t be printed by the government to devalue its debts. Commodities and land are the obvious choices, and yet both are lethally illiquid, and land is not fungible either. Preserving capital looks like it comes with some nasty baggage.

The goldbugs would scream “gold” but I’d say they are just chasing bubbles.

History says the best answer is equities, and volatility is the price you pay.

You can invest in real estate through collective investment, though you choose between risks of volatility (REITs) and possible illiquidity (unit trusts).

Index-linked savings certificates are liquid (at a cost of lost interest) and will give a small real return.

I love your photo, by the way, I have many fond memories of the Suffolk coast from childhood.

The trouble with history’s best answer for me is two-fold. One is that I think there are significant headwinds for the economy that haven’r been here before – future energy scarcity and also the unwinding of the recent financial storms.

Interesting that you mention REITs – I wish I could get to understand the issues but I haven’rt cracked that so far, and I’m mindul of Warren Buffet’s “only buy what you can understand mantra”

The picture’s from RSPB Minsmere – it was a lovely morning with a flock of bearded tits foraging in the reeds – heaven!

I second the call for investigation into commercial property, whether through REITs or investment trusts, though you probably wouldn’t want to hold them if you fear inflation.

The other thing to remember is that the FTSE and the UK economy aren’t very tightly coupled.

In fact, recent Goldman Sachs research suggests UK stocks have done very well when governments cut spending (it’s because the pound falls).

See Stock Tickle:
http://stocktickle.com/2010/05/14/goldman-sachs-agrees-with-me-buy-uk-equities/

Glad you found the future self article useful!

the trouble with anything to do with UK property is that it’s irrational and I don’t gel with it at all. I’m someone who’s managed to make a loss on UK house ownership, though at elast i own the damn thing outright now :)

I was surprised that the FTSE100 wasn’t a mirror of te UK economy. I selected a L&G 50:50 UK/Global ETF for my AVCs last year, I’ll probably stick with that after I’ve pumped up my ISA this year. I have used index-linked certs but I don’t believe the RPI inflation figures.

[…] I am distrustful of the UK government, which I believe will debase the currency, shafting savers and hastening in serious amounts of inflation. So the gold and silver holdings (these are ETFs) […]

 

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