What constitutes sensible investing is different for everyone and depends substantially on your current financial situation, present circumstances, future goals, and risk tolerance. Having said that, there are universally applicable points to bear in mind when it comes to investments and your pension.
A great number of people keep their savings in the same, low-interest rate bank account for years on end without looking for better returns elsewhere. There’s a good reason for this – traditional savings accounts offer safety and security because they are deemed to be very low risk. Unfortunately, they also offer very low chances of earning any money. In fact, the majority of savings accounts perform well below inflation, so in the long-term, it’s likely your money will actually be worth less, a decade after it was initially banked. Perhaps not very low risk after all!
When considering where to invest your money, it’s so important to consider your desired lifestyle, financial goals and needs. Are you saving or investing for the long-term – for example your future retirement – or something more short-term, such as a deposit for your child’s first home? The length of time you’re willing to invest your money will impact on how much risk is appropriate.
Short-term goals often require a low-risk approach, i.e. money held in traditional savings accounts. Whereas, with long-term goals you can tolerate increased volatility because most falls in the value of your pensions and investments, will be recouped over time and will generally be offset by gains.
However, many people are deterred from investing because they fear they will lose their hard-earned money. It’s a very real concern, as poor investment decisions can be very expensive. There is a solution though. To mitigate risk, it’s important to remember there is immense value to be gained from diversification. Why? Quite simply, different investable assets have correspondingly different risk levels. For example, investing in emerging markets is riskier than investing in developed markets such as the UK and the US, and investing in smaller companies is riskier than investing in larger companies.
Diversification requires your portfolio to include lower-risk, defensive assets and higher-risk, traditional growth assets.
Although the amount of risk you are willing to take is a matter of personal preference, you need a wealth planner to define the amount of risk you are able and need to take to achieve and maintain the life that’s important to you.
Sometimes the potential returns from alternative growth assets can be alluring, but unless you fully understand the risks involved and are investing an amount you can afford to lose, then they are best avoided. In particular, these kinds of investments shouldn’t be made without professional advice.
At Wells Gibson, we regard ourselves as risk managers as opposed to performance managers – yes, performance is important however if the risks are well managed, you will more than likely capture most of the performance, that capital markets have to offer.