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25/09/19Are you taking enough risk financially?

When you think of financial risk, it is probably potential investment losses that come to mind. Yet, 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 are 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 is likely your cash savings are generating lower returns than they may have in the past.

Why cash is not always king

You have probably heard the phrase ‘cash is king’ but this is not always the case.

Cash is often viewed as a safe haven for your money. After all, it will not 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 are worried about the value of your assets falling, cash can seem like the best option.

However, that is 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 is 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. However, over the long term, the effect can be significant. Let us say you had a lump sum of £10,000 in 1988. To achieve the same spending power 30 years later you would need £26,122. If you had simply left that initial lump sum in a cash account generating little interest, it will be worth less today.

Of course, that is not to say there is not 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 is not a question we can answer here. It is a decision that is 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 are investing
  • How long you will 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 is 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 are unsure if you are 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.