When people started to notice inflation picking up at the end of last year, most economists confidently predicted it was only temporary.

The mood has changed a little since then.

Gas prices have shot up (up 95% from January to May), so has petrol (a record 165 pence per litre in March) and food and non-alcoholic drink prices have had their highest rate increase since 2009.[1]

Overall, we’re looking at 11% overall inflation this year. But we all have own personal inflation basket.

If you travel by car a lot, you’ll naturally pay more attention to the price of petrol (it costs me £30 more now to fill up than it used to). If you eat out a lot, you’ll notice the difference there the most. But as this animated chart of price changes from Institutional Investor shows, in this current environment we’re all feeling the pinch.

Beware of market jitters

Any financial adviser will tell you that one of the most reliable ways over the long term to counter inflation is to invest in bonds and equities.

The trouble is with the year we’ve had so far, travel chaos, the tail end of a pandemic, labour shortages, crisis in Ukraine, have all added to a jittery market. As a result, both equities and bonds have fared badly in the first half of 2022.

So it’s an understandable reaction (particularly when reining in your personal spending), that some might be tempted to change course, even going as far as taking their money out of the markets until things have calmed down.

But while cash might seem a clever move in the short term to avoid market volatility, it’s not a good long-term plan. You might avoid the worst. But you might also miss out on the market’s best days – and this could cost you dearly.

According to JP Morgan’s annual retirement guide, a $10,000 investment over 20 years (based on the S&P 500 index) would be worth more than $60,000 if fully invested.[2] But if an investor, selling out of the market temporarily, missed the 10 best days, that amount would be cut in half. If they missed the 20 best days, that amount would shrink to a third of the potential value.

There’s a saying you’ll hear a lot in investment – “it’s time in the market, not timing the market”. If you take that theoretical example above, seven of the best 10 days came within two weeks of the 10 worst days. You never know when you’re going to get that bounce.

This is where having a financial adviser is crucial

The graphic below shows the investor’s emotional journey.

As the market goes up, optimism increases. As it falls, this can turn to despair. That’s where sell-offs happen, as investors try to avoid making things worse.

It’s as you move into that red zone, that a financial adviser can show their real value. With objective advice, based on evidence not instinct, we can help you avoid making any quick decisions that could have a long-term negative impact on your portfolio.

Here are a few things to consider:

1) It’s all about positioning

Successful fund managers aim to predict trends and reposition their portfolios accordingly, pre-empting, rather than following the market.

For instance, as inflation started to bite last year, the best fund managers will have increased the weighting of companies that are better able to withstand rising price, such as food retailers, and included more companies with so-called ‘defensive’ qualities.

But it’s not about short-term decisions. Buying energy companies would have been a potentially lucrative move in January, as the oil price shot up. But get the timing wrong and the gamble wouldn’t pay off. That’s why the best fund managers will always make sure their portfolios are well diversified, avoiding too much concentration in any one area.

2) It’s an investment not a speculation.

Even with good diversification, in the last few months, most investor portfolios will have struggled.

Some may even have seen dramatic falls. But what I remind my clients is that you need to consider how far your portfolio has come, and how long you have left to run before you need to draw on your investment pot.

A fall of 20% could sound drastic, but it’s likely that would be an investor who is set up for a high level of risk. What does it look like compared with their initial investment? It’s not as if that drop will be from when they started – it’s more likely to be a drop from the most recent high point. This is a crucial difference.

You also have to consider the timeframe: if you’ve still got 10 years or more to go until retirement, then there’s still time for that to correct itself.

3) The first year is always more difficult

For those in that initial period, investing can be tricky. With entry charges, everything tends to be up front. That means in the first year, investors have what seems like a much bigger hill to climb and you might not see much growth.

It’s like taking out a mortgage and putting other charges onto the repayment, you don’t start paying off the capital for a long time after. I tell clients that they need to have at least a five-year horizon before your investment starts working.

The value of advice

A financial adviser is more than just platitudes and reassuring clients to ‘stay calm’.

Instead, we’re there to give objective guidance on what to do next, based on solid evidence and experience. Knowing that those best days often come after the worst.

So that’s why we know that even though times are difficult now, even prolonged periods of high inflation will end. We don’t know when things will change, but they will. In the meantime, the best advice is simple: to stay put and resist action.

[1] Rising cost of living in the UK, UK Parliament research briefing

[2] JP Morgan Guide to Retirement 2022. Based on performance of a $10,000 investment in the S&P 500 between January 1, 2002, and December 31, 2021.