Risk is an essential part of life - could it help you save?
PUBLISHED: 09:42 16 December 2019
People prepared to risk some, not all, of their money could enjoy significantly better returns, says financial expert Peter Sharkey.
Occasionally, I worry that risk is over-estimated and that worst-case scenarios, (from which we're told we'll be safe if we avoid risk), are often beefed-up by people who, frankly, know no better.
Granted, some risk-related warnings are perfectly legitimate. For example, we should warn people of the perils involved if they're daft enough to stand at the edge of a rail platform as an express train careers past at 100mph.
But are warnings needed everywhere?
I was in Bristol recently and visited Durdham Downs, a magnificent vantage point overlooking the Avon Gorge and Brunel's spectacular Suspension Bridge. I would imagine it's about 300 feet above the river. Helpfully, the local council has seen fit to place several signs on the fence at the top of the gorge alerting visitors to the fact that they should proceed with caution as they're stood at the top of a cliff. On a pavement.
It's as bad as finding the rear of a bag of peanuts adorned with a warning saying "May contain nuts", or the top of a plastic coffee lid advising us that the contents may be hot.
Life itself is little more than a series of calculated risks. Absolutely no outcome, however mundane, is 100% guaranteed which means that whatever we attempt, however simple, however often we've done it before, can go completely wrong.
I don't wish to alarm you, dear reader, but the fact is, just about everything we do contains an element of risk. Life insists we must take some and, if we deem the risk too great, avoid others. But perhaps the biggest risk of all is not taking one.
A few years ago, American writer Paul Hudson suggested "…there are risks that everyone should take in life. Why? Because they are almost always necessary ingredients in the recipe that is happiness."
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Note he doesn't say risk is a necessary ingredient for wealth, or riches, or enormous financial gain. Taking risk is an essential part of our wellbeing.
It follows that almost every day, we accept the risk of being judged by our peers, or the associated risk of dealing with the consequences of admitting we're unsure. Away from work, most of us have taken the huge, butterfly-inducing risk of being turned down when asking someone for a date. The risk of rejection usually means that we rehearse our lines and approach beforehand; these words and actions are often based upon lessons learned from earlier mistakes.
Indeed, it could be argued that if we wish to succeed, we need to make mistakes because it's how we learn. If you're not making mistakes, it's likely you're not trying enough things.
Which brings me onto savings.
Let's begin by saying that no-one in their right mind wants to put their life savings at risk by backing an ageing nag on heavy ground over the fences in the 3.30 at Haydock Park. That would be a risk worth avoiding. But what if it was a three-horse race and our ageing steed was priced at 100/1?
I'm not suggesting that savers should turn to gambling as a means of boosting the returns on their money, but scrolling through the list of the nation's best annual savings rates recently was a miserably uninspiring exercise.
The list featured 'easy access' accounts offering no more than 1.45%, although if you're prepared to give four months' notice of your intention to withdraw money, one bank will pay 1.82%, provided you deposit £1,000 in your account. Some 'regular saver' accounts pay up to 3%, but these accounts are riddled with caveats and limits on the amount you can deposit. One bank is offering a three-year cash ISA paying 1.75%, with a minimum deposit of £500. This means you would collect the princely sum of £26.71 at the end of year three. But it is risk-free…
There's little sign that interest rates will move upwards in the foreseeable future. Lots of people have accepted this fact of economic life and decided that while placing a proportion of their savings in a rock-solid, if low-yielding saving account makes sense, better returns can be generated elsewhere - albeit that those returns are not guaranteed. There's a risk, for instance, that you could lose money by investing in a stocks and shares ISA; then again, you may not.
In a low-interest environment, establishing what advisers call our 'risk tolerance' makes enormous sense. People prepared to risk some, not all, of their money could enjoy significantly better returns than those currently on offer to savers. There's an associated risk of course, but then risk is an integral part of life.
TAM Asset Management Ltd offer savers the opportunity to invest in Investment ISA portfolios comprising a variety of different funds pursuing cautious, balanced or adventurous strategies. For further details, please visit the MoneyMapp website.
For more financial advice, check out Peter Sharkey's regular column, The Week In Numbers.