Ollie Smith: As the Bank of England releases perhaps its bleakest recent predictions yet regarding the state of the economy and inflation, I'm here to ask Morningstar Investment Management's Global CIO, Dan Kemp, what it means for investors.
So, Dan, thanks for joining us. Some investors will remember high inflationary environments of old. But for others, this will be their first time. What's the message for the first timers?
Dan Kemp: Well, the message for the first timers, Ollie, is really not to panic. And there's a few reasons for that. The first is that we know that people aren't very good at forecasting the economy, and that includes the Bank of England. So, if you look at some of the statements that they put out just a year or so ago or nine months ago, then they certainly haven't come to fruition as they would have expected, and that's been a continuing theme, not just the Bank of England, but economic forecasters across the world. So, the reality is, we don't know what's coming. And so, while it's an incredibly difficult time for investors and consumers, of course, that high inflation that we've seen recently, the concerns about bills and this expected dip in the economy, remember, that's just one outcome as we look forward. There's many other things that can happen, and it's really important not to get hooked on one particular narrative.
Smith: What does a balanced portfolio look like in this higher inflation world?
Kemp: Well, with a balanced portfolio, the key is to build something that is robust to a wide range of possible outcomes. And this goes back to the point I made about narratives. It's so easy for us to be hooked by a compelling narrative, a story of the future. But in reality, as I said, there's just wide range of outcomes. And so, you need a portfolio that's going to be robust to whatever the economy throws at us. And so, that means not focusing the portfolio too closely on a recession or too closely on continued growth or high inflation but having parts of the portfolio that will react in different ways, and that's what we call having a diversified portfolio.
Now, the important thing to remember about a diversified portfolio is when some things are doing well, some things are doing poorly, and that's not a bug, that's a feature of diversification. That's how it's meant to be. So, as you think about your portfolio over the coming months and years, if something is doing poorly in that portfolio, that doesn't mean it's not doing its job. It's just that the rest of the portfolio is benefiting from the current environment and it's not. But as that environment changes, you may see that move around.
Smith: And just finally, people may be watching their bank balances and thinking probably now isn't the time to spend a couple of thousand pounds getting some advice for financial planning. But it could really pay off, right?
Kemp: Ollie, it could, absolutely. I can't overstate the value of good independent advice. And so, if you're thinking about your future, particularly if you're at one of the pivotal stages of life, then do go and see a financial advisor. They can make an enormous difference.
Smith: Awesome. Thanks for this. For more on inflation and the economic climate, check out Morningstar.co.uk. Until next time, my thanks to Dan. I've been Ollie Smith for Morningstar.
