INFLATION has sat below 2 per cent for almost two years now and there is little sign that it is going to rise in 2016.

At first glance it may seem that low inflation is good for investments – you don’t have to make much of a return to beat an inflation rate of 0.1 per cent after all. But, even a tiny inflation rate compounded over time can erode your wealth.

“In the last 15 years, if you had done nothing at all with your money it will have more than halved in value,” says Nicholas Wilson, divisional director at Brewin Dolphin Newcastle. “Low rates of inflation compounded up over long periods can be really quite detrimental to the health of your wealth.”

Over the past 10 years, the retail price index (RPI) has risen by 34.5 per cent. Assuming that low inflation means your investments don’t have to work very hard is therefore a big mistake.

With inflation, you must remember that the rate is affected by a variety of factors. The latest inflation figures showed food prices continuing to fall as we near 18 months of price wars between the supermarkets. Investors may want to steer clear of food retailers. The tumbling oil price has also had a major effect.

But, the price of clothing and footwear rose by 2 per cent between September and October as people felt better off and hit the shops. People are also spending more on leisure goods, such as computer games or consoles, according to the Office for National Statistics.

Despite a low inflation rate, certain areas of the economy are performing reasonably well. This means there are investments out there that offer real returns if you know where to look. Just make sure you don’t start taking unnecessary risks in the hunt for growth.

“You shouldn’t take an undue level of risk in order to achieve an income goal,” says Mr Wilson. “Just because you are prepared to take a bit of risk, doesn’t guarantee you a greater return.”

“The key to investing in the current environment is getting the balance right. You want to balance security against understanding that you need to take some degree of risk to make sure your money keeps pace with inflation. In general, that means investing in a basket of assets,” he adds.

The key is not to just look at which investments perform best in times of low inflation and then pile your money in. Certain stocks may be delivering impressive returns but they could carry far more risk than you should be considering. The best thing you can do is get professional advice so that your investment portfolio is aligned to grow despite low inflation, but still matches your risk profile.

THE opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd. No Director, representative or employee of Brewin Dolphin Ltd accepts liability for any direct or consequential loss arising from the use of this document or its contents. Any tax allowances or thresholds mentioned are based on personal circumstances and current legislation which is subject to change.