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Investment risk is scary…

…But so is the return on cash

People tend to be very risk adverse and, understandably, worry about losing some of their hard-earned cash. However, in this low-interest rate landscape, it is likely you will lose ‘real’ value by storing your cash in the bank. The relentless monster of inflation eats away at the value of your cash over time.

 

Inflation is the increase in prices over time. A typical chocolate bar cost about 22p in 2002, in 2015 the same chocolate bar costs about 40p. This represents an 80% price increase over 13 years¹. £1 in 2002 could buy you 4.5 bars, in 2015 it’s 2.5 bars. This might be good for our waistbands but not for our wallets.

 

The inflationary rate for the UK is currently 2.4% (CPI) as of September 2018². The Bank of England base rate of interest is currently 0.75%³, let’s assume this is the interest you get from the cash deposited in your bank account. This means that the ‘real’ value of your cash is reducing by 1.65% over the year. By investing you can seek higher returns to combat inflation. But with reward comes risk.

 

Inflation rate vs Bank of England Interest October 2008 to September 2018

 

Investment risk is the degree to which investment performance can differ from the expected performance. This includes the possibility of losing some or all or the initial investment. Some investments such as Government bonds will have a low potential gain but is unlikely to lose money. Some investments such as smaller company stocks and shares have a very volatile share price but have higher potential returns.

 

A wealth manager has the job of balancing the level of risk you are happy with and getting the highest potential return. With literally thousands of investments out there this can be a tricky job requiring years of experience. A person with a long-term investment horizon is likely to be able to take higher risk. It is scary to see your investment value drop in the short term but over the long term, you would hope to see the overall performance above the level of inflation. Adding ‘real’ increased value to your wealth. A more risk-adverse person might invest in a lower yielding investment but with the knowledge, there won’t be a sudden drop in the value.

 

Wealth managers diversify your cash among many different investments at a risk level that is suitable for you. We ask a number of questions to identify your ‘risk level’, which can be from 1 (the lowest) to 5 (most adventurous). Then we use a combination of our expert knowledge and technology to spread your cash across a portfolio that is suitable for you.

 

We would always suggest you hold some cash for emergencies and unexpected events. But holding all your wealth as cash can have long-term consequences as inflation eats away at the value. We recommend investing for a minimum time-frame of two years but preferably five or more.

 

¹ http://epidvisualisations.medschl.cam.ac.uk/foodprice/

² https://www.ons.gov.uk/economy/inflationandpriceindices

³ https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp

 

Disclaimer:
The views contained herein are not to be taken as a recommendation or advice. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. A mandatory sell of a theme may result in a taxable capital gain or loss. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find on Tiller’s website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. It should be noted that investment involves risks, the value of investments may fluctuate in accordance with market conditions and investors may not get back the full amount invested.


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