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At the moment, I’m focussing on stocks to buy that can protect me from the pressures of rocketing inflation.
Consumer prices in the UK rose by 9.9% in August, a fraction below recent 40-year highs. For this reason, the Bank of England (BoE) is tipped to raise its base rate by 75 basis points when it meets today.
Rising interest rates can have a significant impact on corporate profits. As market analyst Sam North of eToro notes: “Higher interest rates discourage spending and restrict growth opportunities.”
3 ways investors can protect their wealth
Interest rates are expected to end today at 2.5%, the seventh rise on the spin. And the market widely expects the BoE to raise levels to around 4% by the start of next summer.
I’ve altered my investing strategy in 2022 in response to this changing landscape. Here are three ideas I think are great ways for investors to protect their wealth.
1. Get defensive
North notes that “high-growth, higher-risk assets don’t tend to react so well to higher interest rates.” So reducing exposure to high growth stocks can save an investor from taking an almighty financial hit.
Instead, North suggests that acquiring classic defensive shares like banks, property stocks and utilities is a good idea. He notes that “people will always need banks, somewhere to live, or gas, electricity and the internet, making them a safer bet in less favourable economic times.”
I have bought renewable energy producer The Renewables Infrastructure Group. I’m also thinking of investing in FTSE 100 stocks BAE Systems, Vodafone Group and National Grid. Demand for weapons, telecoms and electricity transmission services remains solid even as inflation and interest rates rise.
2. Prioritise dividend investing
The impact of rising rates on company profitability can significantly limit share price appreciation. In this environment buying dividend shares can help investors continue making money.
North says that “generating a return on a monthly, quarterly or annual basis can be helpful in keeping your investments increasing while markets stagnate.”
Those stocks above all pay market-beating dividend yields. And the London Stock Exchange is packed with other big-paying income stocks. Top dividend shares I’ve bought in 2022 include care home operator Target Healthcare REIT and housebuilder Persimmon.
Yields at these companies sit at a delicious 6.6% and 15.9% respectively.
3. Diversify into other assets
As interest rates rise, North notes that equities are “likely the safest bet” for investors. However, he also says that investing in bonds which provide a fixed interest rate can be a good idea.
Investing in the US dollar — or in assets that are denominated in the dollar — can pay off too in tough times, North explains. This is because investors flock to the currency as a safe haven.
Indeed, the performance of the greenback in recent weeks underlines his point perfectly. The US currency has in recent hours struck new 37-year highs against the pound.
I plan to continue prioritising investment in UK shares as interest rates rise. Following the strategies of market experts like North could help me make big returns even during these difficult times.