Are you taking enough risk financially?

When you think of financial risk, it’s probably potential investment losses that come to mind. But not taking enough risk with your wealth can be just as damaging financially.

News that UBS, the world’s largest wealth manager, will introduce a penalty for clients that hold a large portion of their assets in cash accounts gives the perfect opportunity to look at whether you’re taking enough investment risk.

From November, wealthy clients of UBS will face an additional annual fee of 0.6% on cash savings of more than €500,000 (£458,000). The penalty rises to 0.75% for those with savings that exceed two million Swiss francs (£1.7 million). The minimum fee is €3,000 (£2,746) a year. A UBS client holding two million Swiss francs in cash would face an additional annual charge of 15,000 francs (£12,624).

The negative interest rates set by the Swiss National Bank and the European Central Bank are behind the decision for the new penalty. Negative interest rates mean cash deposits incur a charge for using an account, rather than receiving interest.

Whilst the UK does not have negative interest rates, they have remained low since the 2008 financial crisis. The Bank of England base rate is just 0.75% and has been below the 1% mark for the last decade. As a result, it’s likely your cash savings are generating lower returns than they may have in the past.

Why cash isn’t always king

You’ve probably heard the phrase ‘cash is king’ but this isn’t always the case.

Cash is often viewed as a safe haven for your money. After all, it won’t be exposed to investment risk and under the Financial Services Compensation Scheme (FSCS) up to £85,000 is protected per person per authorised bank or building society. If you’re worried about the value of your assets falling, cash can seem like the best option.

However, that’s a view that fails to consider one important factor: inflation.

The rising cost of living means that your cash effectively falls in value in real terms over time. In the past, you may have been able to use cash accounts to keep pace with inflation. But low-interest rates mean that’s now unlikely. Over time, this means the value of your savings is slowly eroded.

At first glance, the annual inflation rate can seem like it will have little impact on your savings. But, over the long term, the effect can be significant. Let’s say you had a lump sum of £10,000 in 1988. To achieve the same spending power 30 years later you’d need £26,122. If you’d simply left that initial lump sum in a cash account generating little interest, it’ll be worth less today.

Of course, that’s not to say there isn’t a place for cash accounts in your financial plan. For an easily accessible emergency fund, a cash account may be the best home for your savings, for example. Yet, in some cases, taking the right level of investment risk is essential for not only growing but maintaining wealth.

How much investment risk should you be taking?

Whilst holding your wealth in cash is potentially harming the outlook of your financial plan, you may be wondering how much investment risk you should be taking.

Unfortunately, it’s not a question we can answer here. It’s a decision that’s personal and should be made taking your circumstances and aspirations into account. For some people, investing in relatively low-risk investments that aim to match inflation will be the right path. For others, taking greater risk will be considered worth it when the potential for higher returns is considered.

When deciding how much risk your investment portfolio should take, areas to think about include:

  • The reason you’re investing
  • How long you’ll remain invested for
  • Other assets you have and the risk profile of these
  • Your capacity for loss
  • Where investing fits into your wider financial plan
  • Your overall attitude to risk

Understanding the level of investment risk that’s right for you and the portion of your wealth that should be invested can be challenging. This is where we, as financial planners, can help you. We aim to work with you to create a financial plan that puts your short, medium and long-term goals at the centre of decisions. If you’re unsure if you’re taking enough, or indeed too much, risk financially, please get in touch.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Why you should link lifestyle goals to a financial plan

When you think about the goals you hope to achieve, do you have a clear plan in place for the cost of doing so? Without a blueprint to follow, it can become all too easy for goals and opportunities to pass by whilst focussing on the day-to-day.

You might have a range of goals that you’re working towards, but it’s likely that at least a significant portion of these depend on your finances too. Whether you hope to support children through university or want to start retirement by travelling to exotic destinations, it’s money that will help you tick off these lifestyle aspirations.

Linking lifestyle goals with your financial plan has numerous benefits, including:

1. Motivation

We’ve all set out a goal with the best intentions, only for the steps needed to reach it to slowly fall down our list of priorities. Whether you hope to make regular contributions to savings accounts, overpay the mortgage or boost your pension, without linking it to a goal it’s easy for it to be forgotten about.

Linking it to a lifestyle goal can provide you with the motivation needed. Making a sacrifice now, knowing it’s going to fund your dream to give up work can spur you on. Knowing that retiring early means keeping on top of finances can encourage you to engage with pensions and other assets more frequently.

2. Assessing how realistic they are

You might have a grand plan, but is it realistic? Working towards a goal that isn’t going to be achievable can lead to disappointment. When you’re setting out goals, taking a look at your financial situation can help you see how realistic they are. You might find you need to scale back or alter plans in some way, but, on the other hand, you may find you’re in a better position than you thought, and you can start dreaming bigger.

3. Put them into context

On top of understanding how realistic your goals are, the process can also help you put them into context. Whilst you might be hoping to pay off your mortgage ten years early, how will this positively influence your retirement plans, for instance? The answers can provide you with financial motivation to continue working towards the bigger picture. Alternatively, if you knew spending your savings on travelling for an extended period of time now would have an impact on your long-term income, would you still do it? Putting goals into context can help you set out a blueprint that brings together multiple aspirations covering the short, medium and long term.

4. Confidence

Being able to track your progress and refer back to your initial goals, with an idea of how financial steps will help fund them, can boost your confidence. Sometimes, the effort you’re taking towards goals can seem abstract and there may still be concerns about how likely you are to reach them. But knowing you have a financial plan in place to support them can give you peace of mind when it’s needed.

5. Prepare for the unexpected

No matter how carefully we plan, obstacles and challenges will come our way. Linking your goals to your overall financial situation can help you reduce the impact of these. Building up a financial buffer can help absorb unexpected costs, while other steps, such as diversifying investments, can keep you on track even when things outside of your control happen. It’s not possible to predict what will happen in the future, but considering possibilities can help you create a robust plan.

Financial planning puts your goals and priorities at the centre of a financial plan. It’s an approach that can help you improve financial security and build the lifestyles you want, to discuss your aspirations, please get in touch.