Bank of England Governor Mark Carney intimated that individuals should consider more risk to get better financial returns from their savings. But investors should tread carefully.
Mr Carney may find his use of monetary policy to prise people out of safe government bonds and savings accounts creates a climate where investors feel risk is some sort of sanctioned security, which could not be further from reality. In fact, the danger is that reckless decisions become mainstream. In other words, we may see rather more ‘ostrich moments’: when it suddenly seems sensible to throw every spare penny at something, often for no other reason than reading about its promise.
Why an ostrich? Apart from the obvious phrase of “not sticking your head in the sand, like an ostrich” which is still apt here, my reference is more to do with the actual ostrich. Not many years ago, farming the large flightless birds was going to be huge in Britain, at least according to excitable reports suggesting families would be routinely tucking in to the meat. Only they don’t. It remains a niche taste, and has grown accordingly with investors losing out badly. The ostrich lesson is particularly relevant today and whilst the pressure from policy makers to explore exotic options for returns may be persuasive, it should be treated with caution.
The key to making investment decisions is not being told to be adventurous, but understanding the risks when you are. Saving for retirement, for example, is different to saving for the satisfaction of speculative gain.
Every person is different, too, by age and circumstances. An investor in their seventies may have different needs to someone in their thirties, or to a self-employed entrepreneur.
Ready, steady, slow
But one feature is often shared: caution. Most of us want to be able to sleep at night without worrying that our entire financial future is at risk in some nail-biting, permanent game of money roulette.
We have other worries, too, so it makes sense to keep an amount in cash. This liquidity avoids the hazard of being forced by an emergency to sell an investment when its value is low.
Unfortunately, cash gets outperformed by inflation. However low the headline inflation rate may be, the cost of goods and services in many areas will always rise, devaluing money as it goes. Consideration to some wider investing is crucial.
Diversification is a must to spread risk. I have come across investors with their entire savings in three stocks. However good those individual companies may be, as an investment decision it is unwise. Shares are volatile, and sectors drift in and out of favour. Consideration should be given to a mix of investments which may include areas such as shares, Government bonds and property; in effect, a balanced portfolio without dependence on one sector or asset class.
Caution is not a fixed measure. People with a great deal of money and experience may be able to take higher risks, of course, and be advised accordingly. But the best advice for anyone is still to get advice and only from an adviser who is regulated by the Financial Conduct Authority. They are required to understand risk, and the best of them will establish, as we do, a personal risk profile to help their clients make decisions.
These are complicated times for investors as they face the twin dangers of low savings rates and increasing personal inflation rates. But one piece of solid investment advice is to be very wary of pressure from policy makers. Their motives may not be the same as yours.
If you would like to discuss the issues raised in this article please contact Tim Maakestad, Partner and Director of Kreston Reeves Financial Planning at firstname.lastname@example.org or on +44 (0)330 124 1399.