Diversification key in protecting your portfolio from inflation
Portfolio diversification can help investors beat the impact of rising inflation, with peer-to-peer lending allocations set to become increasingly valuable.
Inflation reached a 40-year high of 10 per cent in July 2022, before falling slightly to 9.9 per cent in August. However, some analysts have predicted that the rate of inflation could reach as high as 22 per cent by the end of the year, as rising energy prices, supply shortages and the cost of living take their toll.
Meanwhile, cash savings account rates have rallied to around three per cent over the past few months. While this represents a years-long high, these savings rates still fall far short of the rate of inflation.
In order to protect your savings and investments from erosion due to the rising cost of living, portfolio diversification is essential.
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This means reviewing your existing portfolio of savings and investments, and making a few changes in line with the current economic climate. Conservative investors may choose to take on a little more risk in order to boost their overall returns. This could mean making space for a new asset class such as P2P lending or cryptocurrency, alongside existing investments in bonds, equities and cash.
P2P lending has a proven track record of being able to deliver inflation-beating returns even during periods of economic uncertainty.
Earlier this year, exclusive data from Peer2Peer Finance News found that Innovative Finance ISAs – the tax wrapper for P2P investments – have returned between 7.8 and nine per cent per annum over the past four years, even after any defaults and other losses have been considered.
This suggests that P2P investments could play a stabilising role in a diversified investment portfolio, offering higher returns than cash savings and less volatility than the stock market.
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