Ideas to consider for investing in shares to beat inflation

On New Year’s Day, many kickstart January with a New Year's resolution. Some give up chocolate, while others exercise more. A few take up a new hobby. But a handful resolve to spend less and save more money. And while this is a worthwhile goal, savers in 2022 should expect to be hammered by rock-bottom interest rates and soaring inflation.

The Office for National Statistics put November’s UK Consumer Prices Index inflation rate at 5.1%. And it’s expected to rise further before calming down. The Bank of England has responded by raising the base interest rate from 0.1% to 0.25%, and some banks are starting to offer slightly higher interest rates on savings accounts. But the interest rates on offer aren't keeping up with inflation.

And this means that money sitting in a typical UK bank account loses spending power every day. As prices rise but account balances seem to stand still, more and more consumers are starting to notice.

Meanwhile, energy bills are slated to rise an additional 50% in April. The average household gas bill could soon hit £2,000 per year, with Ovo CEO Stephen Fitzpatrick believing gas prices will ‘become an enormous crisis for 2022.’

And according to Nationwide, the average home is now worth a record £254,822, having risen a staggering £23,902 over the past year. Rents have soared to a record average high of £1,029 per month. And there’s a raft of tax rises coming in April, that the Resolution Foundation believes will make the average household £1,200 a year worse off in 2022.

The question then, is one of how consumers can best put their money to use next year. Of course, every individual has different needs. But over the long term, investing has proven to generate better returns than leaving money in saving accounts. But while a third of British citizens want to start investing in 2022, most don’t know how.

Preparing to invest

To re-iterate; this is general guide, and not investment advice. Personal finance is complex, and it may be better to take professional advice.

That said, there are some oft-taken preparatory steps. The first is to pay off any high-interest debt. According to the UK Debt Service, the average credit card debt per household stands at £2,085, while total unsecured debt is £3,713 per adult. Bank of England figures show that the average annual interest rate on credit cards is 21.49%, and borrowers pay £122 million per day in interest alone. By comparison, the FTSE 100 rose 14.3% in 2021, its best year since 2016. An individual with average unsecured debt and credit terms is best off paying it first.

The second is to max out any workplace pension, which is an incredibly tax-efficient method of investing for most employees. For some, it can make sense to invest in a Self-invested Personal Pension (SIPP) as well, but that’s beyond the scope of this article.

Then it’s worth considering how much money can be comfortably invested. Many advocate for pound cost averaging; rather than investing a lump sum all at once, putting smaller amounts of money into the markets over a long period of time. It’s common to invest a set percentage of net pay each payday. While this method restricts investment at the top of the market, it also stops investors from ‘buying the dip’ and acquiring more shares for the same amount of money.

And the market does ebb and flow. The UK’s most well-known index is the FTSE 100, which represents the UK’s 100 most valuable companies by market cap. In 2020, the pandemic crashed the index 14.3% to 6,460 points over the course of the year. In 2021, it rose 14.3% to 7,384 points. And as past performance is no guaratee of future results, 2022 could see similar volatility, or none.

But as a rule of thumb, time in the market beats timing the market. The index is up 574% since its inception in 1984. And as short-term market volatility is relatively common, investors usually plan to keep their money in the market for at least five years, and often longer. Moreover, markets crashes are often accompanied by economic recessions— along with redundancies, corporate bankruptcies, and general upheaval.

Therefore, the time when investors might need to ‘cash out’ their investments is often exactly when the investments are at rock-bottom. Therefore, it can make sense to have several months’ worth of living expenses saved in cash before starting to invest.

Finally, for those under the age of 40, opening a Lifetime ISA (LISA) is a popular choice. The government will top up £4,000 of savings per year with a £1,000 tax-free bonus up until the age of 50, and account providers will add interest as well. This represents a virtually unbeatable zero-risk 20%+ rate of return.

Start investing with IG

Finally, newcomers could start investing in an IG stocks and shares ISA. The advantage to this account is that there is no tax due on the capital gains or dividends earned, which is particularly pertinent as dividend tax is rising by 1.25% in the next tax year.

There is a £20,000 annual maximum that can be saved across all types of ISAs, including the £4,000 LISA limit. But over time, compound returns on investments held inside the tax wrapper can create a sizeable nest egg.

From this point, investing can be as complex or simplistic as desired.

It can be as easy as buying a full replication FTSE 100 index tracker fund. This strategy has several advantages. The index consists solely of low-risk blue-chip companies, that generally have solid financials and dependable returns.

This makes it a lower risk option and can be particularly beneficial for investors who are closer to retirement and may need to ‘cash in’ their investments during market corrections. And as it only includes UK stocks, there are no currency fees involved. Moreover, investors should already be familiar with many of the companies listed, which can help in the early days of trading.

Investors can also buy into one of the other 2,000 Exchange Traded Funds (ETF) that IG offers. However, these come with their own advantages and setbacks. While competitive, there’s usually management fees and other costs. And when investors buy into an ETF, they are buying the multiple shares and other assets that the ETF has invested into. And as many ETFs follow investing trends to try to outperform the market, they can come with a higher level of risk due to weaker diversification.

But naturally, with higher risk comes bigger rewards. And ETFs allow investors to buy more stocks with less research; for example, by buying an ETF that focuses on ethical investing. And it’s worth thinking about the amount of money involved; £10,000 can be a life-changing amount to one investor, and pocket money to the second. IG does offer an ETF screener that can help clients decide which to invest in.

Of course, no investment is entirely risk-free. And for many, much of the enjoyment of investing is in picking individual stocks. The top FTSE 100 riser of 2021 was Ashtead Group, soaring an impressive 90%. But it’s also worth remembering the fallers; long-term shareholders of IAG or Rolls-Royce can attest to a balanced market view. For some, it can be simpler to start investing using IG’s actively managed Smart Portfolios, with management fees capped at £250 a year.

Want to start investing?

Go short and long with spread bets, CFDs and share dealing on 16,000+ shares with the UK’s No.1 platform.* Learn more about trading shares with us, or open an account to get started today.

* Best trading platform as awarded at the ADVFN International Financial Awards 2021