Signs of higher inflation abound. Beating inflation to preserve spending power is therefore high in many investors’ minds.

Bank of England chief economist Andy Haldane chimed in just this week, reports Reuters:

“If wages and prices begin a game of leapfrog, we will get the sort of wage-price spiral familiar from the 1970s and 1980s,” Haldane said, adding that inflation would not be on the same scale as in those decades.

In an interview with LBC radio earlier on Wednesday, Haldane said inflation pressure in Britain was looking “pretty punchy”.

9 June 2021, Reuters

Of course, predictions of higher inflation rival England’s football team for hype versus reality.

Surging inflation and English football glory have both been notably absent for many decades.

Inflation’s coming home

Indeed, one way to preserve the real value of your pound would have been to bet against England at every major tournament in my lifetime.

You’d probably have multiplied your initial stake nicely by betting that way – and reinvesting the proceeds each time.1

Betting against England might be a way of beating inflation.

However nobody sensible would say betting for or against England was a way of hedging against inflation.

While I haven’t earned a PhD crunching the numbers, England’s footballing performance surely has no correlation with inflation.

A sports team – and hence your bet – will win or lose irrespective of the inflation rate, in other words.

Whereas a hedge against inflation would be expected to protect against a decline in the spending power of your money due to rising prices.

Multiplying money via a wager – and so getting more spending power, beating inflation – doesn’t mean you actually hedged against inflation.

Beating inflation with a Banksy

So far so obvious – albeit dispiriting for England fans.

Yet the same confusion between beating inflation and hedging against inflation appears often in the investment world.

Right now asset managers are marketing their products as inflation hedges.

Here’s an advert I saw on Facebook under the banner: “Want a hedge against inflation? Invest in art today.”

Who wouldn’t want a 16,347% return over 13 years? Sign me up!

Actually, not so fast.

On these numbers, this (unnamed) piece of art would have been a fabulous investment.

But the advert tells us nothing about whether art is good for hedging against inflation, as opposed to beating inflation.

True, the 16,347% return equates to almost 50% a year on a simple annualized basis. Unless you’re getting clobbered hyperinflation, a 50% return a year will surely do a good job of beating inflation.

It would also turn anyone with a few paintings in their attic into multi-millionaires.

But I’m highly skeptical that anyone should expect a typical piece of art to go up in value near-50% a year over the next 13 years.

Annual returns around the 7-8% range from art are more typical what I’ve seen touted.

Yet even if your art choice did so well, I’d congratulate you on your luck or a great eye – but not necessarily on your choice of an inflation hedge.

At least not just because its price went up a lot.

To view art as an inflation hedge, we’d need a thesis as to why art should hedge against inflation (easy – real assets tend to go up over time, with inflation) and data showing correlation (I’ve never seen that for art).

Equities have a record of beating inflation

What about shares? Many people – me included – tend to think of equities as protecting against inflation.

We have our reasons. Companies can lift prices in response to inflationary pressure. They often own real assets such as land and property. Over time profits and dividends can rise – in contrast to bonds with fixed coupons. All of this means share prices can rise in the face of higher inflation.

However the authors of the Credit Suisse Equity Yearbook refute this notion.

The renowned academics divided equity and bond returns into buckets representing different inflationary regimes – from marked deflation through stable prices to very high inflation – as follows:

Their work shows the return from bonds varies inversely with inflation. At times of deflation (left-hand side) bonds do very well. They get smashed by high inflation (right-hand side).

Equities do much better than bonds most of the time – the exception being times of extreme deflation.

But real returns from equities are negative with very high inflation, although they still beat bonds.

We can’t really call equities an inflation hedge then. Not when their real return falls with high inflation!

The professors note:

These results suggest that the correlation between real equity returns and inflation is negative.

i.e. equities have been a poor hedge against inflation.

There is extensive literature which backs this up. Fama and Schwert (1977), Fama (1981), and Boudoukh and Richardson (1993) are the three classic papers.

Credit Suisse Equity Yearbook, 2021

If this fact is so accepted in academic circles, why do we think of owning equities in the face of rising inflation?

It’s because the returns from equities have a strong record of beating inflation over the long-term.

Shares do not hedge against inflation. But the magnitude of their out-performance versus other assets means over many decades and cycles they’ve typically delivered the best returns, easily beating inflation.

What assets really hedge against inflation?

Generally you want to own real assets – ‘stuff’ – when inflation takes off, if you want to hedge against inflation.

After all, inflation in part expresses how the price of stuff is changing.2

The following from Bank of America (via Trustnet) shows such correlations:

Most things are positively correlated to inflation over the long-term.

Even cash! (That’s because interest rates tend to rise as inflation rises.)

The big exception is long-term government bonds. These are negatively correlated.

If inflation heads a lot higher then you’d look at returns from long-term bonds through your fingers. From behind the sofa.

Note the image shows correlations, not past or future returns.

The price of platinum is strongly positively correlated to inflation. That doesn’t mean platinum will necessarily be a brilliant investment.

Picking your poison in 2021

The best hedge against inflation are products designed for that purpose.

Index-linked government bonds, perhaps a basket of inflation-linked corporate bonds, or NS&I index-linked certificates.

However index-linked bonds are very expensive today. They are vulnerable to interest rate rises.

Corporate bonds introduce credit risk.

As for NS&I certificates, they aren’t even available to new investors. They also pay a pathetically low real return to those who already own them.

You’ll be hedged against inflation with NS&I index-linked certificates for sure. But you’re guaranteed to only just beat it…

Beyond that – and set against everything I’ve written above – I believe most of us should concentrate more on beating inflation than hedging against it. For a private investor with real world spending concerns, the long-term outcome is more important than the short-term correlations.

For most of us that means a healthy allocation to assets like equities and property – and crossing our fingers that we don’t face 20 years of stagflation. (You might want to own some gold in case of that).

Given how strongly correlated bonds are to inflation – they will surely do badly when inflation is running hot – you could argue holding fewer in a portfolio is also an effective way to dial down inflation risk.

However the more you reduce your government bonds, the more exposed you are to stock market falls – and also to deflation.

Beating inflation over the long-term

Finally, what do you know about inflation that the market doesn’t? It’s been constant media chatter for months now.

Someone somewhere is always warning of higher inflation.

I first saw that Bank of America forecasting imminent inflation – complete with an earlier version of its correlation image I included above – in the Financial Times in 2016.

And before that, at the start of QE I worried – like most people who didn’t work at the US Federal Reserve – about the inflationary consequences of monetary expansion.

Well it’s been 12 years and we’re still waiting!

Remember, if you’re working your income is likely to rise with inflation. Also if you own a house with a mortgage, over the medium-term inflation will probably push up prices while whittling down the real value of your debt.

Passive investors are probably best mostly sticking to a diversified portfolio, with a mix of assets aimed at beating inflation over the long-term, while also guarding against other scenarios.

If you want to gamble, punt on your national football team!

1. I’m assuming you’d earn a return on your stake between tournaments. And I haven’t done the maths! But given England hasn’t won anything since the 1960s I’m confident. [↩]
2. The other part is changes in the price of services. [↩]

Many in the Monevator community ask about how to manage multiple portfolios, especially as part of a single family household.

Reader Sunil sums up the dilemma:

I understand the importance of diversification, but what about across multiple portfolios?

I have a SIPP and ISA, and run a SIPP and ISA for my wife. That’s four portfolios.

I’m not sure it’s prudent to pick the same set of funds for each, or even the same kind of asset split across all four.

I find it incredibly difficult to decide across four portfolios. Add to that, both my kids now have ISAs – I might end up running six portfolios!

Any thoughts?

The standard advice is that different investment objectives are best handled by separate portfolios, each with their own asset allocation.

For instance it’s very likely that the goals for kids’ ISAs are quite different to that of the adults in a household.

The latter tend to be into boring stuff like retirement. Children less so!

One thing to rule all your multiple portfolios

When family members share an objective, the standard advice is to treat your various accounts as a single portfolio.

That keeps things simple – assuming you have joint finances.

With the single portfolio mindset, there’s no need to replicate your 5% gold allocation, say, across four different accounts. You can keep your gold fund in one place and so avoid multiplying your dealing fees per account.

This ‘notionally single portfolio’ approach helps with tax-planning, too.

For example, you could tilt towards equities in your ISAs, and bonds in your SIPPs, to avoid breaching the Lifetime Allowance on your pension.

To recap, the basic advice is:

• One family portfolio per shared investment objective
• Spread across multiple accounts as needs be
• Using a single asset allocation

I recommend keeping track of this gestalt portfolio with a tool like Morningstar’s Portfolio Manager.

The tax problem with multiple portfolios

That’s the standard advice, and it’s perfectly sound.

I came to regret it, however.

I ran the family Accumulator’s accounts as a single portfolio. We held different equity sub-asset classes in our SIPPs and all seemed well.

But one sub-portfolio did much better than the other. And so one now looks like the pumped-up arm of an Olympic javelin thrower. The other like a T-Rex’s puny forelimb.

Okay, the difference isn’t that extreme but one portfolio has certainly been much luckier than the other.

That’s because it holds the lion’s share of our US equities. And they’ve beaten the bejesus out of everything else.

As a consequence, we’ll have to drawdown harder on this over-performing portfolio.

A more even split of our bills would be more tax-efficient. Now we’ll pay more income tax as one SIPP portfolio tunnels more deeply than anticipated into a pricy tax bracket.

A richer family than ours could also trigger Lifetime Allowance events if one of their SIPPs was particularly over-stimulated.

If your SIPPs won’t dance on the borders of the tax bands then it won’t matter. But for anyone young-ish or rich-ish, that’s hard to predict.

It’s not just SIPPs

You could also face the same predicament if one family member’s General Investment Accounts bursts its tax-free banks excessively.

Theoretically this shouldn’t matter for stocks and shares ISAs because they’re tax-free.

Except they’re not quite… Because if you die (god forbid) then ISAs lose their tax shield – in the event that you pass them on to anyone except your spouse or civil partner.

That would include your unmarried partner, kids, or favourite pet gerbil.

In these cases your ISAs also fall into the Sarlaac Pit of inheritance tax. And hence they are no longer really tax-free.

ISA assets affect your eligibility for many mean-tested benefits, too, whereas pre-retirement assets sitting in a pension scheme do not.

Being caught out by any of these scenarios might leave you worse off as a family unit than if you’d just set up two mirror portfolios.

In retrospect, I wish I’d mirrored our respective holdings so we could spread the tax burden more evenly across our tax allowances.

Of course, mirror portfolios do double your dealing fees.

But you can dodge that hit by using multi-asset funds like Vanguard LifeStrategy, or at least minimise the impact by choosing simple two or three fund portfolios.

Platform collapse

Lopsided portfolios could also hurt if your investment platform / broker goes bust. Your assets are likely to be frozen while the administrator cleans up the mess.

What’s that? You had the foresight to open your partner’s accounts at a completely different platform that’s unaffected by the upheaval?

Okay, but sadly your broker was swept away in an economic tsunami that’s also wiped double-digits off your partner’s portfolio because the low-risk bonds were in your accounts.

And let’s say in this (hypothetical, somewhat extreme) example that it takes more than a year to unfreeze your assets.

Meanwhile, household bills surround you like kung-fu baddies. The only way to fend them off is by selling your partner’s equities when they’re down. Which is something that ideally you’d never want to do.

Granted, this is a low-probability scenario. But it’s one you can strike off your worry-list by maintaining a strong slug of low-risk assets in both partners’ portfolios.

Ask the Monevator massive

These may be edge cases but the standard advice doesn’t always apply when it collides with the quirks of the UK tax system. I had no idea The Accumulator family would be an edge case when we started out.

I’m interested to hear how the Monevator community manages multiple portfolios. Please let us know how your household handles this problem in the comments below.

Take it steady,

The Accumulator

This article exploring dogs and financial independence is by The Mr & Mrs from Team Monevator. Check back every Monday for more fresh perspectives on personal finance and investing from the Team.

When The Mr & Mrs moved out of London, top of my – The Mrs – agenda was getting a dog. My husband and the youngest child were less keen.

My childhood memories centred on rural adventures accompanied by various dogs – all long gone now to the Great Kennel in the Sky.

The Mr grew up in a pet-free house on a busy city road.

The Mr: Actually we had cats for a time, but I don’t talk about them. They weren’t as much part of our childhood. Cats aren’t part of the family like dogs. And we got fed up with them being injured or worse on the road.

“Dogs are like toddlers,” I tell The Mr, setting back Project Dog by 18 months. (Both of us had endured our kids’ pre-school years in a blur of exhaustion.)

Dogs are also more expensive than back when I paid £35 for my first dog, aided and abetted by my mother.

I’d washed cars, weeded gardens, and sold homemade biscuits. I’d diligently coloured in each pound I earned on a ‘sweat’ chart. And, for every £5 I raised, my parents pledged to buy a piece of essential kit starting with the feeding bowl and culminating in a dog bed.

Enter Show Dog

My first dog – hereafter called ‘Show Dog’ – set a high standard. I chose her from a squealing litter of pups and, unwittingly, picked a champion.

This is roughly akin to a rookie investor picking Tesla shares in mid-2019 on the basis that they liked the company name.

It didn’t take long for my mother to realise my pedigree pooch was a perfect specimen of her breed – or that serious money could be won at dog shows.

Our weekend routine changed as I learned some simple cost-benefit analysis featuring:

1. The type of show, number of classes for which Show Dog was eligible, and total entry fees payable.
2. The unit price of petrol, a guesstimate of mileage and travelling time, and the allocations of prize money.
3. The random element – the judge. Show Dog was the blackest black and was unlikely to be highly-placed by a judge known to prefer blondes…

There were highs – seven rosettes in one show!

And there were lows, such as the time Show Dog refused all instruction at a Very Important Event, careered around the ring, and leapt up to kiss the judge’s nose.

We drove home in silence, brooding on the financial hit.

Positive financial returns

Training, showing, and breeding dogs was not my family’s livelihood.

(If you are interested in showing your dog or other competitive activities like agility or flyball, then Crufts’ resources are a good place to start.)

No, Show Dog’s success was unusual; she was a child’s pet. Show Dog was fuss-free (no clipping required) and barely saw the vet.

Her winnings paid for her keep. Her two litters of pups covered their costs with extra to spare. One puppy even had a lucrative turn as a ‘moveable prop’ in a big-budget Hollywood film.

Overall verdict: Over her lifetime, Show Dog made a small net financial contribution of approximately £200 to the family income.

Beware of the Diva Dog

Not every dog is as cost-effective as Show Dog turned out to be. In contrast, the dog I chose as The Mr and Mrs’ first family pet – Diva Dog – has been a constant drain on the family coffers.

Diva Dog confirmed all The Mr’s misgivings about mixing dogs and financial independence.

From her puppyhood, Diva Dog was charged with three strategic objectives:

1. Train the whole family in handling dogs. Specifically, cure the youngest child of a crippling fear of dogs. (A drastic solution, I know. There’s good advice at Dogs Trust.)
2. Create positive family memories and act as a canine counsellor for the children at stressful points in their lives, like exams or friendship fall-outs.
3. Assist in the family’s fitness regime. Model good health, and rarely trouble the vet.

In fairness, Diva Dog excelled in the first two tasks.

However, my Midas touch deserted me when choosing Diva Dog from her siblings. Instead of spotting championship potential, this time I paid £850 for what was probably the runt of the litter (and during lockdown prices have risen substantially since then, too).  

The Mr: We paid how much?!

Diva Dog is much smaller than her breed standard. She has long fur and panics at any loud noise, despite coming from working gundog stock (though she does love a karaoke party).

Diva Dog is an expert counter-surfer and pavement-snacker. No food is safe from her snout.

And here’s the rub: Diva Dog is hyper-allergic to almost everything, especially commercial dog foods. So Diva Dog’s endless scavenging means she is on first name terms with all the vets and nurses at our local practice.

Start-up costs: purchase, vaccines, essential dog kit, micro-chipping and basic obedience classes – around £1,400 (in 2013 money)

Ongoing costs: specialist food, standard (wormers, flea and tick) and prescribed medicines for ear/skin flare ups; kennels or holiday pet insurance; general pet insurance, replacement toys, and so on. In 2020, Diva Dog cost almost £1,700.

Overall verdict: Diva Dog is a financial liability!

Owning a dog is a lottery

Show Dog and Diva Dog are financial outliers. Most pet dogs will fall somewhere in the middle. Lifetime costs can vary wildly, even between dogs of a similar age, size, and breed.

You might re-home a rescue puppy that needs behavioural help. You might choose a retired working dog that arrives fully trained but gets increasingly expensive to insure. Or you might experience a change in your circumstances and need to pay for daily dog walking for your pet.

But the real cost of dog ownership lies not in money. It’s measured in time.

The time factor

When people say they’d love a dog but can’t afford one, what they usually mean is they don’t have the time.

And, if you lack time, then owning a dog – with or without a quest for financial independence – is not for you.

Dogs are social creatures. While some dogs may be shy introverts, most want to be with you, at the centre of things. No dog wants to be left in solitary confinement all day, every day. The general consensus is that four hours during the daytime is the maximum length of time to leave a dog on its own.

The Mr: For me, the key is that they are part of the family. Consider your dogs in all decisions, just like you would any other family member.

For most people on the path to FI, it’s less a question of having enough money for a dog, and more about existing and future time commitments.  

Perhaps you work from home and choose to slow down? You sacrifice a year or two to reaching your FI number in exchange for canine companionship on the path to financial freedom.

Or maybe your FI strategy is to work long hours, create a dog-budgeted savings goal, and then to look forward to early retirement.

Either way, know there are ways to get a dog-fix without the need for potentially expensive ownership. For ideas, take a look at Walk My Dog, Cinnamon Trust, or guide dog fostering.

In praise of dogs

If dogs are expensive and eat into all your available time, then why own one?

It’s certainly a mystery to friends who are happily dog-free.

As I type this blog, Diva Dog is snortling in her basket – a reassuring sound – and The Young ‘Un is keeping my feet warm.

My dogs will get restless if I sit still for too long so I have no need of a Fitbit, Apple Watch, or timer.

There’s less need to pay for exercise classes. Every day in all weathers I’m out with the dogs. And dog walkers are a sociable crowd, even at 6am.

Whenever somebody or something is outside of our house I have an early warning system.

I am no longer susceptible to fast fashion. There’s no point wasting money on strappy shoes or silk dresses when I’m mostly wading through puddles.

Finally, I have canine companions who are quick to tune into emotional moods. They snuggle up when they sense you are sad and become playful when they can tell you are happy.

The Mr: This last one is literally priceless!

Dogs and financial independence

Here are a few top tips if you’re still interested in owning a dog.

Research, research, research

Assess your lifestyle honestly and choose a dog breed that’s a good fit. Even if you want a rescue dog of uncertain parentage, different breeds have different behavioural traits. Check out the Kennel Club’s databases. Also try Crufts Meet the Breed, once this sort of thing restarts.

Shun the puppy farm

Always get your dog from a reputable source, whether it’s a friend whose dog has puppies, a rescue centre, or a Kennel Club Assured Breeder. This will also minimise your risk of buying a stolen dog. Ideally you will see the mother, if buying a pup. Expect the breeder or rescue centre to ask you searching questions about your ability to keep a dog!

Dogs are valuable

Make sure your garden boundaries are escape-proof. Periodically recheck them. Crawl around your rooms to discover what a dog – especially a teething puppy – might find interesting. Microchip your dog, and attach a collar tag with just your mobile or landline details. Don’t skimp on vaccinations.

Invest in training

Basic training at village halls can be crowded, noisy, and confusing for you and your dog. It can pay dividends to have a trainer come to your home, especially if you have never owned a dog before or several family members are giving the dog different commands. Classes can bore clever dogs. Taking them to flyball, agility, or similar sessions will be fun, while sneakily improving overall obedience.

Don’t shop around on insurance

If you have pet insurance and have made any claims, resist the temptation to shop around for a cheaper renewal. Insurers will not cover preexisting conditions, so you may end up paying for any ongoing ones on top of your insurance. It’s galling to see the premiums mount up each year, but there it is. And of course as your dog gets older they will be more expensive to cover. You can self-insure if you are very disciplined. Set aside what you would have paid on insurance each month and use that to cover vet bills.

Be patient

It takes time to gain a dog’s trust and loyalty. Be kind. Be consistent. Look forward to seeing a happy wagging tail each morning!

Owning a dog may prolong your journey to financial independence. But what matters most is being judicious about what you sacrifice, rather than giving up everything you want along the way.

In The Mr & Mrs’ household, our dogs and financial independence have – on balance – been reconciled. The dogs help us stay on the path to financial independence. Because we are all in it together.

In time you will be able to see all The Mr & Mrs’ articles in their dedicated archive.