Welcome to High Edge Financial
Planning, your local independent financial planning and advisory
professionals and our column on issues relevant to financial planning
and advice.
Investment and Risk
We’ve gone through some testing times
in the last few years: banks collapsing, credit crunch, stock markets
falling and then bouncing back. What is one to do when it comes to
investing money? If you ask anyone what they would like from an
investment the typical response is ‘no risk and a big return’!
Utopia!
However, all investments and savings are exposed to one or
more forms of risk and it is true to say that by taking increasingly
more risk you can achieve a better return over the longer term.
Term: why is that important? Well,
depending on your investment horizon (the period over which you are
prepared to invest), it will dictate the type of asset you may
consider for the investment. As a rule of thumb, if your investment
horizon is under 5 years, you would generally be better off investing
in deposits with a bank or building society. This is because if you
need the money in the short term you would not want to expose
yourself to the risk of not being able to access it, or getting back
less than you have invested due to asset price movements.
When investing for 5 years and beyond
you open up other investment possibilities. The traditional asset
classes are: cash, bonds, property and equities. Each carries a
different level of risk and within each asset class you can access
different levels of risk. A key consideration for the investor is
that of risk and return, and capacity for loss. For instance, you
could build a portfolio of shares yourself, but that can carry a high
degree of risk, as you are relying on your own experience and
research capabilities to select the right stocks.
There are also different types of risk.
Inflation risk is a particular issue right now as cash deposits are
paying low rates, whilst inflation is higher. Your money is therefore
losing value in real terms.
There is market risk. This is where
your investment is subject to the ups and downs of the markets. This
could be the stock market.
Concentration risk is where you may
have all your cash in only one or two asset classes or investment
funds. A way to tackle this issue is to diversify your investment.
This means to invest varying percentages in different funds and asset
classes to spread the risk and also the return (the not having all
your eggs in one basket principle).
Counterparty risk is typically found in
what are called ‘structured products’. These are products which
aim to provide a return of capital after a fixed term if the stock
market index they are linked to falls. The provider enters into
financial arrangements with other counterparties to provide the
capital protection.
However, as found when Lehman Brothers collapsed,
the counterparty may not be able to uphold their obligations to the
product and consequently the return of capital could be affected
adversely.
Consideration also should be given to
the Financial Services Compensation Scheme limits for deposits and
investments. This could affect how much you invest with one
institution.
So, I am barely scratching the surface
here on this A5 page. A lot of thought needs to be given to how you
invest and this depends on a number of factors personal to you. I
would suggest that when in the position of considering investments,
speak with someone who has access to the whole of the market and can
therefore offer independent, impartial advice.
High Edge Financial Planning is an
appointed representative of Unleash Advice Partnership Ltd which is
authorised and regulated by the Financial Services Authority.
Information presented here is generic, does not constitute specific
financial advice and are personal opinions of
the author. For advice tailored to match your personal
circumstances, please feel free to contact us on 07773 426498.
Rob
Terry
Independent
Financial Advisor
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