ASK THE EXPERTS

ANGUS KERR, REGIONAL DIRECTOR AT RATHBONES, ON THE PROS AND CONS OF INVESTING IN THE STOCK MARKET

MY CASH SAVINGS ARE NOT YIELDING MUCH RETURN. I AM CONSIDERING INVESTING IN THE STOCK MARKET INSTEAD BUT NEED TO WORK OUT HOW MUCH RISK I CAN HANDLE. HOW CAN I DO THIS?

ANSWER: You are wise to consider investing rather than keeping everything in cash savings since currently low interest rates mean that your savings could be being eroded by inflation. However, as you say, it is important to evaluate your appetite for risk before deciding. You should consider these four main risk categories:

Inflation risk – i.e. that savings or investments won’t keep up with inflation (currently 2.7%). Volatility risk – that you’ll see large swings in the value of your investments.

Interest rate risk – that investment growth won’t keep up with interest rates being paid elsewhere. Default risk – that the institution holding your investments will fail and the capital could be at risk. Think carefully about how you feel about these, then match them against your financial goals. When I have conversations with people about their risk appetite, I often ask:

What’s your timeline? If you can leave your investments alone in the long term you may feel able to take on more risk, as investments can often ride out any periods of volatility.

What proportion of your wealth are you investing?

If it’s all of your savings you may want to safeguard some funds to protect against loss of assets. What’s your capacity for loss? This is different to risk appetite. It means your ability to absorb falls in the value of your investments and whether these would negatively impact your standard of living. If you have no capacity for loss you shouldn’t consider investing. What will you use your money for when you cash in your investments? For example, paying off debts, funding school fees or as a source of income in retirement?

With all these factors to consider, it is worth speaking to an expert. A good investment manager will recommend regular re-evaluation exercises, combining risk calculating tools, market assessments and face-to-face discussions, to get a well-rounded picture. This will help you make effective investments that suit your circumstances.