I had the pleasure of taking part in Fusion’s first ‘Money Matters’ webinar this year. It was great to have you all along and we had some good questions in the chat, for us to answer. Hopefully a few more pennies saved in those tax returns.
Cash and The Long Term
During this webinar, I made points on the impact of inflation on cash and the real term losses being made by many, who perhaps choose to use Cash ISA’s or savings accounts for their mid to long term savings.
Thousands of people across the country put their faith in bank accounts and products, to turn themselves a small profit for keeping their hard-earned savings in their care. With falling interest rates, this profit has got smaller and smaller and smaller.
Meanwhile, inflation is raging and when it hit 7.1% (measured by RPI), it shows the cost of goods across the country has risen substantially.
So, you will have received around 1% of interest (being very optimistic here) but now everything costs 7.1% more. Meaning by holding cash, you effectively could be considered 6.1% worse off last year. Not good!
What is Risk?
I always say that the alternative to holding cash is to take a proportion of risk and invest in the market. At which point many people grab the arms of their chair in fear at the mere mention of the R word.
However, if given the chance to explain what I mean, which the webinar gave me the chance to do, I can explain exactly what investment risk is, rather than sounding like I want to put your money in a pot and set fire to it, in the hopes that it will double.
The main risk that people are concerned about is the risk that they will get nothing back or get back less than they put in. This is investment risk.
What we generally mean by investment risk, when using a fully diversified portfolio of asset classes and sectors, is VOLATILITY. Being how much an investment goes down in the bad times and also how much it will go up in the good times. All backed up by many years of proven investment theory.
Volatility it the staggered ups and downs of the investment lines that we see, when people talk about market crashes and roaring growth, which is apparent in an investment over many years. The point is that hindsight shows us that these are short term and that overall, as long as the line is pointing up from when you originally invested, then the bits in the middle tend to matter less.
We therefore take a lot of time to assess and confirm your attitude to risk. Which simply enough defines how much of a dip you would feel comfortable in riding out in a single year, to potentially achieve better returns. We then invest accordingly, to prevent those ‘Oh My God’ moments, when the market crashes, but also to get those ‘Wahoo’ moments when the market heads back up.
Studies have shown that the greater investment ‘risk’ taken, the greater the long-term returns are expected to be. However, with the pot and fire example above, this does not mean any risk taken has a guaranteed long-term gain.
What is a Good Investment Term?
If you are looking to pop away some cash for 6 months, hoping it goes up in value and then withdrawing it again, that simply exposes you to too much short-term volatility in your investments* to make this advisable. So how long would we advise investing for?
We would say that more than 10 years is potentially a justifiable term for an investment but would encourage a longer term. Therefore, the perfect investments to really review and consider in detail are those that you plan for retirement. Mainly your pension.
With potentially 30+ years of investing funds for income after you retire and your whole working life to save those funds beforehand. Your pension is the single most important investment to review regularly and make sure this is getting good bang for your buck.
Likely you already have pensions and during our webinar I spoke about how the investments within old plans tend to ‘go stale’ and cause your pension to underperform all the way up to retirement. Which could have serious effect on your standard of living.
At the same time, making sure you are funding your pension every year is essential. From the tax efficient benefits of doing this, to the natural benefit of putting more money away in the first place. If you are not doing this, I suggest a chat to understand why perhaps you should be.
We always aim to cover retirement planning, that some of you may be starting to get more engaged in, or perhaps have not thought about at all. Again, with the tax year coming to a close, now would be the perfect time to get in touch and talk about the benefits you might be missing out on otherwise.
We touched on the upcoming tax year end in April and will be having more webinars to cover this topic in detail. So, watch this space, follow Fusion Consulting Ltd. on LinkedIn and perhaps get in touch for a more 1 to 1 session with me, to find out about all of the things you should be doing before 5 April.
Separately, I provide a free consultation for potential queries, so you can get some quick tips and assess if there is any value to seeking further advice going forward. I would love to hear from you all.
*Investments – The value of units can fall as well as rise, and you may not get back all of your original investment. Past performance is used as a guide only. It is no guarantee of future returns.
Please note: Tax Planning advice is not regulated by the Financial Conduct Authority.
Fusion Financial Ltd. Ref: 11600565 Registered in England & Wales. Registered Office: Marlborough House, 298 Regents Park Road. Finchley London N3 2SZ Fusion Financial Limited is an appointed representative of The On-Line Partnership Limited which is authorised and regulated by the Financial Conduct Authority.
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