With inflation and interest rates rising, as well as the continuing aftermath of Covid, and now Russia’s invasion of the Ukraine, it’s fair to say the stock market has had a shaky start to 2022.
If you would like to learn more about the stock market’s volatility and ways you could protect your wealth, please read our recent blog.
That said, even with the market volatility, investing your cash might still be the smartest way to protect it from the long-term effects of inflation. The Times reports that the Bank of England’s interest rate is expected to reach 1.25% by the end of 2022, yet inflation could exceed 7% by April 2022.
This means the deals offered for savings accounts could be significantly below the rising cost of living.
If you’re considering investing, you need to consider the level of risk you’re prepared to take, and the potential impact of a loss on your finances. Read on to discover how a financial planner uses your attitude to risk and capacity for loss to find the right investment for you, and why the two can sometimes conflict.
Before we do, we need to consider why investing may still be the smarter way to inflation-proof your money.
Too much risk can lead to losses – but so can too little
Your attitude to risk is the level of risk you are happy to expose your money to when investing.
Typically, potential growth comes from the higher-risk assets within your investment, such as stocks and shares. This means the more risk you’re prepared to accept, the greater potential growth your investment could enjoy.
As such, investing is a balance between having enough risk to offer growth potential while reducing your exposure to potential losses should the market take a downturn. Your personality, the level of investment knowledge, and length of time you want to invest for will usually decide this.
For example, if you have an investment time frame of 5 to 10 years before you’ll need to access your investment, you might be more risk-averse than if you had 15 to 20 years.
That’s why financial planners take time to understand your attitude to risk and identify investments that are the most suitable for you.
The level of risk you take must fit with your financial situation
Strict rules laid down by the Financial Conduct Authority (FCA) mean that a financial planner has to consider your ability to financially absorb any losses your investment might make. This is known as your “capacity for loss”.
If a loss has a detrimental effect on your standard of living, this must be taken into account by the planner before recommending an investment. When you consider the volatility of the market so far in 2022, you can see why this is an important point to consider.
This means the planner must consider your assets, age, liabilities, and expenditure to work out how much risk you can “afford” to take, regardless of how much risk you are “happy” to take.
Your capacity for loss and attitude to risk may be at odds
While you may be happy to expose your cash to higher levels of risk to increase growth potential, it would be irresponsible for a financial planner to recommend it if you cannot absorb a financial loss.
Doing so could have dire consequences for your standard of living or long-term financial security, which is why your capacity for loss typically takes precedence over your attitude to risk.
That said, if you can afford to absorb a loss but don’t want to take higher levels of risk, the financial planner must also respect this.
Get in touch
As award-winning financial planners, we can help ensure your investments are in line with your attitude to risk and capacity for loss. This provides peace of mind that your money is exposed to a level of potential growth that could help you meet your financial goals without putting your financial security at risk in a market downturn.
If you would like to discuss inflation-proofing your money through investing, please contact us on hello@ardentuk.com or call 01904 655 330.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
