A bit of caution is wise, but when it becomes a barrier to progress, it turns reckless. Here we explore how playing it too safe with your money can be more damaging than market volatility for your future.
What comes to mind when you think about risky investing? How about cryptocurrencies, venture capital, maybe even pine forests or whiskey barrels?
But there’s a lesser-spotted risk that many people are exposed to without knowing it. When it comes to building long-term wealth, being overly cautious can be just as – if not more – reckless than any of the latest investing fads.
Being recklessly cautious with your money means holding too much in cash for too long or sticking mainly to low-risk investments, like bonds, when you don’t need to.
On the surface, avoiding market volatility in this way may seem ‘safe’. But over time, it can erode your purchasing power, limit financial growth and leave you unprepared for the future, which could all dampen your quality of life.
The fact is, if your money isn’t growing at least as fast as inflation, it’s losing value in real terms. Even modest inflation can significantly reduce your purchasing power over the years. Since 2000, UK inflation has nearly doubled the cost of living. Most savings accounts just can’t keep up.
No investment is risk-free, but not accepting some volatility – ups as well as downs – means closing the door on higher returns over time. It also means you miss out on compounding returns – interest on interest and other gains – the most powerful force in investing.
Without realising it, however, many people are affected by a psychological bias known as ‘loss aversion’ – fearing losses more than you value gains, even when they’re the same value. Scaremongering headlines don’t help.
Not accepting some volatility – ups as well as downs – means closing the door on higher returns over time.
While Jill has some volatility, Jack is sacrificing 6% of his savings so he can sit squarely within his comfort zone – £6,000 a year for every £100,000 he has. That’s some expensive emotional comfort!
Time after time, the global stock market has historically rewarded patient investors. If you have 10+ years to invest, you have enough time to see benefits from the long-term growth of equities.
Whether its early retirement, funding your idea of fun or supporting the next generations, an overly conservative strategy may simply not get you to your future goals.
It’s not just about affordability. If you bundle away too much money in cash without doing anything with it, you’re not only missing out on better long-term returns; you’re potentially missing out on a better quality of life.
As a financial planning firm with 30 years in the field, we’ve unfortunately seen many people who have left it too late to enjoy what they have. While it’s sensible to keep some cash aside for contingencies and invest more conservatively as you age, don’t let the fear of running out of money stop you from making the most of your life.
As a financial planning firm with 30 years in the field, we’ve unfortunately seen many people who have left it too late to enjoy what they have.
As always, the key to good investing is a sensible, diversified investment approach, tailored for your situation, attitude to risk, goals and time horizon for investing. Defensive assets like cash and bonds often have a place in a portfolio, but that should be to provide a buffer for market downturns, not to do the heavy lifting.
A good Financial Planner can help keep your emotions in check and balance caution with your need for income and growth over the years through a clear, objective plan to achieve the lifestyle you want. Perhaps this is best illustrated through one of our favourite pieces of client feedback:“I know I'm no richer having come in to see you, but somehow I feel richer.”
“I know I'm no richer having come in to see you, but somehow I feel richer.”
We didn’t magic up some extra money for that client, but we did give them the clarity and confidence to invest in a better quality of life. So live a little – eat the cake, buy the shoes and take the trip – because sometimes, the biggest risk is doing nothing at all.
If you want to chat about how to make the most of your finances, get in touch.