How high is your risk?

ON MEETING p o t e n t i a l c l i e n t s , I i n v a r i - a b l y h e a r comments a l o ng t he l i n e s o f : “We worked hard for our money and it needs to last us through our retirement, so it must be safe”. The markets have been jittery over the past few weeks, largely caused by uncertainty in China and the slowing of its rapid growth. There has been much coverage of this topic in the media and it is events such as these that cause private client investors to view the stock market as risky and hence not a “safe” place to put their savings.

The stock market is also one of the most profitable if not the most profitable asset class over the medium and long term. Markets go up and down, plain and simple. If you want those higher returns you have to tolerate some bumps along the way. China’s stock market has been volatile recently but this should be viewed in context of the circa 150 per cent rise last year.

There are other risks that investors face that in my view are more dangerous than the normal ups and downs of the market. However, these are often overlooked as they do not generate headlines in the way that falling markets do.

INFLATION RISK

This is one of the greatest investment risks and is often underestimated. People do not fully appreciate the effects of inflation as it is less transparent; your pound may be worth less but you are still holding the same pound, whereas if your investment goes down from £1 to 80p that is visible. Over the past 10 years the consumer price index shows UK inflation was 28 per cent (source: ONS) — your pound now buys 72p. This is a significant drop in spending power over a period that has had unusually low inflation. Your investments would need to grow 28 per cent just to stay still.

LIFE EXPECTANCY RISK

We are now living longer than ever. While medical advances are a tremendous blessing, they also create a difficult financial reality. Today a person could realistically be retired for 30plus years and their savings must last for that time. No one wants to run out of money in their lifetime.

CURRENCY RISK

If you plan to spend the rest of your life in the UK, this is less of an issue. However, if you are looking to move abroad, having all your money in sterling represents a risk, as you are reliant upon just one economy/currency. My clients who live in Israel are really feeling this, as their pension payments don’t go nearly so far as they used to — sterling has dropped more than 30 per cent against the shekel in the past few years.

INTEREST RATE RISK

Interest rates were 15 per cent in 1990 — a long way from the current 0.5 per cent. This is good news for borrowers but savers have suffered for a long time with little or no interest. Predictions are of a very slow rise, to perhaps two to three per cent over the next four to five years, which means savers will

continue to have very little income from their deposits for the foreseeable future.

TAX RISK

Particularly in the 40 or 45 per cent tax bracket, people see a significant reduction in their returns after tax.

Fortunately there are still ways of legally avoiding or reducing tax on investments. This holds true for UK residents and even more so for anyone who is considering moving to a lowtax environment such as Israel in the future.

It surprises me how often I meet people who are concerned about losing money with their investments but, due to a lack of appropriate advice and planning, are “losing” money by paying unnecessary tax.

MANAGEMENT RISK

Clients often come to me with a mass of investment documents. However, no one is monitoring what they have or how it is performing. I am sure that all their investments made good sense at the time but are they still relevant and appropriate today? I see people taking too much risk by holding on to old, inappropriate investments without any strategy.

There are many risks associated with investing. Markets moving up and down as we have seen recently is just one of them. Some of the other investment risks are of more concern to a long-term investor.

The “safest” way to invest is by having your money spread in a wellresearched and diversified portfolio, ensuring that the risk profile and asset allocations exactly match what you require. This, along with adequate cash reserves, should prove most rewarding over time. Simon Benarroch is a chartered wealth manager with Raymond James Investment Services. He is a regular lecturer on aliyah investment issues and can be contacted on 020 8202 1944 or simon.benarroch@raymondjames.com Tax treatment depends on an investor’s individual circumstances and it may be subject to change. Certain investments carry a higher degree of risk than others and are therefore unsuitable for some investors