Wednesday 18th September 2019
When you think of financial risk, it’s probably potential investment losses that come to mind. But not taking enough risk with your wealth can be just as damaging financially.
News that UBS, the world’s largest wealth manager, will introduce a penalty for clients that hold a large portion of their assets in cash accounts gives the perfect opportunity to look at whether you’re taking enough investment risk.
From November, wealthy clients of UBS will face an additional annual fee of 0.6% on cash savings of more than €500,000 (£458,000). The penalty rises to 0.75% for those with savings that exceed two million Swiss francs (£1.7 million). The minimum fee is €3,000 (£2,746) a year. A UBS client holding two million Swiss francs in cash would face an additional annual charge of 15,000 francs (£12,624).
The negative interest rates set by the Swiss National Bank and the European Central Bank are behind the decision for the new penalty. Negative interest rates mean cash deposits incur a charge for using an account, rather than receiving interest.
Whilst the UK does not have negative interest rates, they have remained low since the 2008 financial crisis. The Bank of England base rate is just 0.75% and has been below the 1% mark for the last decade. As a result, it’s likely your cash savings are generating lower returns than they may have in the past.
You’ve probably heard the phrase ‘cash is king’ but this isn’t always the case.
Cash is often viewed as a safe haven for your money. After all, it won’t be exposed to investment risk and under the Financial Services Compensation Scheme (FSCS) up to £85,000 is protected per person per authorised bank or building society. If you’re worried about the value of your assets falling, cash can seem like the best option.
However, that’s a view that fails to consider one important factor: inflation.
The rising cost of living means that your cash effectively falls in value in real terms over time. In the past, you may have been able to use cash accounts to keep pace with inflation. But low-interest rates mean that’s now unlikely. Over time, this means the value of your savings is slowly eroded.
At first glance, the annual inflation rate can seem like it will have little impact on your savings. But, over the long term, the effect can be significant. Let’s say you had a lump sum of £10,000 in 1988. To achieve the same spending power 30 years later you’d need £26,122. If you’d simply left that initial lump sum in a cash account generating little interest, it’ll be worth less today.
Of course, that’s not to say there isn’t a place for cash accounts in your financial plan. For an easily accessible emergency fund, a cash account may be the best home for your savings, for example. Yet, in some cases, taking the right level of investment risk is essential for not only growing but maintaining wealth.
Whilst holding your wealth in cash is potentially harming the outlook of your financial plan, you may be wondering how much investment risk you should be taking.
Unfortunately, it’s not a question we can answer here. It’s a decision that’s personal and should be made taking your circumstances and aspirations into account. For some people, investing in relatively low-risk investments that aim to match inflation will be the right path. For others, taking greater risk will be considered worth it when the potential for higher returns is considered.
When deciding how much risk your investment portfolio should take, areas to think about include:
Understanding the level of investment risk that’s right for you and the portion of your wealth that should be invested can be challenging. This is where we, as financial planners, can help you. We aim to work with you to create a financial plan that puts your short, medium and long-term goals at the centre of decisions. If you’re unsure if you’re taking enough, or indeed too much, risk financially, please get in touch.