The Bank of England (BoE) recently announced a rise to its base rate, up from 0.5% to 0.75%. While this marks a return to pre-pandemic levels, after a decade of poor rates, the interest rate on your high street bank savings account is unlikely to be a match for rising inflation.
With the cost of living on the rise and cash funds unable to keep pace, you could find that your money is effectively losing value in real terms.
Now might be a good time to consider investing – either by adding to an existing portfolio or building a portfolio for the first time.
You’ll need to consider three linked factors:
1. What is your long-term investment goal?
2. What is your attitude to risk?
3. What is your capacity for loss?
Keep reading for a closer look at how HDA can help you understand the effect a drop in investment value would have on your standard of living, and how large a drop you could realistically absorb.
Capacity for loss versus attitude to risk
Attitude to risk
Your attitude to risk will be influenced by many factors. From the length and purpose of your investment to the attitudes to money you were exposed to in childhood, there is a lot to consider.
If you’re saving over decades for your own retirement, you might be willing to take more risk than if your goal is to pay for your child’s higher education in just five years. Natural risk aversion (or its opposite) could also play a part.
Your attitude to risk might change at different stages throughout your life. Milestones like buying a first home, starting a family, or entering retirement could all shift your priorities and perspective. There is nothing wrong with a fluid risk profile – just be sure you keep track of your investments to ensure the two always align.
Capacity for loss
Your capacity for loss is more tangible. It is the size of the investment loss you would be able to absorb without detriment to your standard of living.
By looking at your incomings and outgoings we can help you understand the difference between your regular, necessary expenditure and the areas where you could cut back. This allows us to find out your true level of disposable income.
We can also consider not just the lifestyle you are living now, but your desired lifestyle in later life.
The calculations we perform based on the above information will allow us to understand your capacity for loss. This, in turn, will help to decide the level of investment risk that is right for you.
The risk you are willing to take versus the risk you can afford to take
Your attitude to risk and capacity for loss might not align. By getting to know you, your circumstances, and your aspirations, we can take this into account when we build your financial plan.
For example, while you might be willing to take a large amount of risk, that doesn’t mean that you need to. Remember that investment is not a competition.
The aim is not to make the highest gain as quickly as possible. Instead, it is about achieving your long-term goals while taking as little risk as possible. That means being patient, focusing on your goals, and avoiding trends or emotional knee-jerk reactions.
Stock market volatility is to be expected and you’ll need to understand that your fund can drop in value as well as rise. The general trend of the markets, though, is upward. That is why patience is so vital, along with having a firm grasp on your capacity for loss.
If you are naturally risk-averse, it is worth remembering that there are risks associated with not taking enough risk. With inflation high and savings rates low, an investment could offer the chance to make inflation-matching – or even inflation-beating – returns, aligned to your goals.
Get in touch
Generally, the higher your capacity for loss, the more risk you will be able to take, but that doesn’t necessarily mean that you should. Always be guided by your attitude to risk, balancing the amount of risk you are willing to take with what is affordable for you.
If you’re considering investing for the first time but are worried about the risks attached, we can help. Please get in touch via email at enquiries@hda-ifa.co.uk or call 01242 514563.
Please note
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.
