Xentum | Inflation & Financial Planning – Q&A with Jonny Lord APFS

Inflation & Financial Planning – Q&A with Jonny Lord APFS

April 14, 2022 - 3 minutes read

Posted by Claire Parker

With reports that inflation is rising at its fastest rate for 30 years, we all have to take stock of our finances. In this Q&A, Jonny Lord, looks at how inflation can affect financial planning.


Q. Most people invest for the long-term. However, inflation puts their purchasing power at risk. What do you advise clients who are worried about the future value of their money?

The main thing is to have a long hard look at cash holdings and assess whether you really need what you have on deposit or whether it would be better served in investment markets where it has a chance to keep pace with or outstrip inflation. It isn’t going to do this in the bank.

Q. What about clients who have a short-term demand on capital – say, within five years? Are there ways to adjust their portfolio if they need to draw on cash sooner than later?

If you have a sound financial plan, you will have already analysed what you need in ready cash to deal with any short-term capital needs. In investment terms, this is five years or less. We wouldn’t advise investing cash that you think you will need in the short term.

Q. Are there certain types of companies/businesses that historically fare better in times of upheaval and which clients can put some faith in?

Yes, but trying to buy into thematic investments at the ‘right’ time is almost impossible to do consistently and at the right price. It is best to take a long term view and hold a broad spread of equity assets as well as less risky assets such as bonds to dampen volatility.

Q. The geo-political situation in Ukraine is a great concern for investors. What type of investment portfolios offer some protection from this scenario?

None. It may sound controversial but geopolitical shocks just like pandemics, cause all asset prices to go down in general terms. This is markets behaving normally and shouldn’t be a surprise to investors if they have good coaching.

Protection comes from having a widely diversified portfolio with a spread of geographical and sector risk and holding your nerve when markets get choppy. Investors that have done well over the past decade or so are the ones that put money when markets were cheap after the global financial crisis. One person’s concern is another’s opportunity.

Q. What do you advise clients worried about their pension investments when their pension income must keep up with the cost of living?

It depends on the case by case situation. Some clients aren’t affected by the overall cost of living increases are their personal rate of inflation is dictated by their individual spending habits and or they have an element of inflation-protected income in their pension. Generally, though, we advise clients to adopt a withdrawal strategy that is robust for the long term and can withstand shocks (which aren’t really shocks since we expect them we just don’t know exactly when they will happen!)

Q. Does your lifetime financial modelling take into account cost of living and inflation anomalies when we normally assume a constant level of inflation?

Our modelling takes a long-term view on inflation that is relatively pessimistic to ensure the plans are stress tested appropriately. We also factor in market crashes to simulate the loss in value in portfolios that occurs when markets experience significant events such as the pandemic.

Q. As lifestyle financial planners, how do you assure investors can still achieve their life-changing goals, such as retiring early, changing careers, or selling their business, when it is hard to calculate the future inflation rate?

Where a client is holding a portfolio that is going to provide for their retirement it is going to have to survive various financial forces including fluctuations in returns and inflation rates. In our modelling assumptions, we use very long term data going back over 100 years to arrive at our average assumptions. Whilst market performance and inflation will never arrive at constant rates, we can be confident that we are using the best data we can access to form our plans, which is all we can do when building a model.

We are also able to overlay historic market conditions on our plans to show if a plan would have worked were it to have run between two historic dates using the actual performance of markets during that time. This can give reassurance that it would have worked in real-world conditions and therefore has a great chance of working going forward.

Do you need help with financial planning?  Get in touch to arrange an exploratory call with a member of our team.