Risk is something we face in every day life and sometimes it’s dealt with through our subconscious mind and other times it’s in our faces.
Managing your personal finances is no different and there is arguably risk in every decision. Buying a house is a risk, putting money in a bank is a risk, investing your money is a risk.
Risk is generally perceived to be about mitigating down side risk (i.e. losing your money), but what about the risk of missing the upside? 2020 was a year like no other and the stock markets resembled that year of change. Some investors will have seen the market news and associated volatility and sold out of their investments. Depending on they held and the timings, that may have been a shrewd decision. Equally, if you’d stayed invested, there’s a good chance you’ve made some profit.
I’ve worked with numerous clients who have traditionally held the majority of their savings in cash (pensions aside), often tying their cash into fixed term accounts. A quick look on the internet suggests the top three year fixed savings accounts are paying around 1.5% of interest per annum. A £20,000 sum would attract just over £900 of interest at the end of three years. The most recent inflation measure (CPI as measured by the ONS) was 2.4%. Yes, the COVID pandemic has undoubtedly caused some additional inflation pressure, but even if this retracts to the governments target of 2%, over three years, your £20,000 savings, would be worth 3% less than the cost of goods increasing at the CPI target. That might not sound huge, but it adds up. The more money you have, the larger the £ value of that discrepancy. Not forgetting that you cannot access your money for three years.
So what to do about it? There are a few options, but the question is what you want that money for. If it’s to fund a holiday in 2022 for example, then an easy access account is probably sensible. If it’s to supplement your retirement income, then you might want to consider investing it. If it’s your children’s savings, then depending on how old they are, again, cash is unlikely to keep pace with inflation over the long term.
This is not a slam dunk decision and investing involves risk, as your capital can go up and down in value. A recent piece of research by JP Morgan suggested there is a 92% chance of a couple aged 65, living to age 80 and 52% to age 90. Unless you’re 77, that’s probably a long way off – those 3% gaps I’ve mentioned above, will absolutely reduce your spending power. Investing can offer the potential for enhanced growth over the years, and better still, when utilising opportunities such as ISAs, that growth can be very tax efficient.
Moral of the story? Be active and make positive steps to help ensure your financial future is in good shape. Think you’ve got too much cash & not sure what to do? Why not book a free, no-obligation chat, at your convenience, by clicking here.
Thanks for reading