Inflation and volatility are rocking the markets. So how can dentists maintain the value of their hard-earned pounds?
Many dentists are keen investors either into ISAs, personal pensions or share portfolios; some prefer to leave their money in cash savings. Wherever you save your money, it is almost certainly being impacted by the current double whammy of record levels of inflation and uncertainty in the stock market.
As a result, you may be considering pulling out of the markets and ploughing cash into current accounts earning zero or very little interest. If that’s you, you’re not alone. Between January and July this year, almost £12 billion was withdrawn from investment funds – the first time in a decade that the amount withdrawn was higher than the amount invested.
As a result, deposits into non-interest paying accounts have ballooned – up over £50billion in the last two years. But having money in current or even low interest rate accounts can be particularly damaging at a time of high inflation. The inflation rate (measured by Consumer Price Index CPI) in the 12 months to August was 9.9%. This figure is forecast to get even higher before it hopefully falls at some point next year.
The cost of inflation on savings
If you have £100,000 in a current account rather than invested in shares, you might feel safer and confident that you’re not going to lose money – but is that true? The reality is that if inflation remains at 9.9% for the next 12 months, the real value of your deposit (ie what you can afford in todays’ terms) is only worth £90,100, and if inflation remains that high for two years (hopefully a worst case scenario), the value would fall to £81,180, a loss of £18,820.
Inflation has always been a threat to cash, it’s just that with the low inflationary environment we’ve experienced over the last decade, it’s not been apparent for some time. We encourage the dentists we work with to take a long-term view of their finances, so they are typically saving whilst they’re earning, and then drawing down their investments during retirement. In this scenario they are investing for a period of 20 - 30 years, and often longer, and it is therefore often completely unsuitable to switch to a low interest savings account.
Rising Interest Rates
The Bank of England is committed to curbing inflation by increasing interest rates. So for the first time in a decade, savers will be getting more than 0.1% interest from their bank account savings. But that’s still not enough to cover the cost of inflation, which is why it’s important to consider investing the money, for example in stocks and shares.
Highs and lows of the stock market
If the alternative to saving cash (where inflation is the risk) is investing in the stock market (where volatility is the risk), how can you manage and accept the fact that investment values will fall as well as rise?
The fact is stock markets go up and down every day, week and month – which is perfectly normal. The latest equity markets study by JP Morgan confirms that the S&P (US stock market returns) annual returns from 1980 to 2021 were positive in 32 out of 42 years – that’s 75% of the time.
For younger dentists, that haven’t invested before, it can seem like you’d need nerves of steel to invest right now. However, for those who have been investing for the last 2-3 decades and have endured several booms and busts (called bull and bear markets); they understand that the doom and gloom headlines we’re reading now are very likely to be replaced with positive news within the next few months. How many months you may well ask? No one knows the answer to that, but this bear market will end at some point and if you want to catch the inevitable bounce back, you have to be invested in the first place.
Are dentists pulling money out of the stock market?
We manage over £100m of money for our dental clients and none of them have withdrawn any funds over the last year because they’re fearful of what might happen next. Is that because dentists are resilient to the headlines, we all watch and read every day? I doubt it. Our clients stay invested because they know the secret to a good investment experience. Stick to the rules in the box below / on the left / right, and ensure you make the most of your money by establishing some key investment strategies.
Thomas Dickson is a Chartered Financial planner at Wealthwide.
Please be aware of the following investment risks
The value of your investment can go down as well as up and you may not get back the full amount invested.
When investing your capital is at risk
Levels and bases of, and reliefs from taxation are subject to individual circumstances and may be subject to change
The Financial Conduct Authority does not regulate taxation and trust advice