With the distractions of the festive period behind us, thoughts often become focused on the year ahead and trying to make improvements to our hectic lives. In my previous two articles I discussed cash savings and how they should be used (if possible, in these increasingly expensive times) to form the foundation stone of our financial planning.
Let’s now imagine that we’re fortunate enough to have an appropriate level of cash savings and feel that we should be doing something else with the extra. Should we invest? Well, just as nearly all of my answers begin… it depends.
As soon as we want to do something with money, that involves trying to get a return that’s better than what is being offered by a Bank or Building Society (in interest), we generally need to make some sort of investment, and virtually all investment comes with an element of risk. Risk is one of those words that can mean something very different to each of us, and there’s also a large spread of different levels of risk. Risk can be something very minimal, that may see the value of our investment go up and down by very small amounts, or, at the other extreme, may see the value of our investment fall to zero (very extreme[!] and only appropriate for a tiny minority).
Because of the spread of different risk levels, and how each of us feel about investment risk, then working out what is appropriate for each of us is crucial. There is so much choice available when it comes to investment, that no one should ever feel uncomfortable with where they’ve invested their money. If they do, it’s almost certainly the wrong investment.
Working out what level of investment risk is appropriate, starts with completing an Attitude to Risk questionnaire. Attitude to Risk is not actually a term that I’m fond of, I much prefer ‘comfort with investment’. Anyway, once the questionnaire is complete (very straightforward, multi-choice and only takes a few minutes), then a conversation is required to explore the answers, to get a better understanding of how someone feels about investment.
One of the common misconceptions about investment and the appropriate level of risk, is concerned with the time available until the invested monies are required. Many times, I’ve sat with clients who are adamant that they are comfortable targeting significant returns (and quite high levels of risk), yet only have a few months before the invested monies are required. In most cases, the shorter the available timescale, then the lower the level of risk probably needs to be.
The reason why the risk level and timescale should usually be considered together, is because of what is known as investment volatility. This is the amount that the investment could go up and down in value; the higher the risk, the more that it could go up and down. If the timescale is relatively short, you usually wouldn’t want it going up and down in value by a large degree, or it could mean that when you come to take the money out, it might be worth significantly less than what you invested.
Anyway, that’s enough for now; my very best wishes for the new year.
David Hinch is the Managing Director of David Burnell Financial Services.