The current pandemic has changed so many aspects of our normal life and whilst we have seen a mixture of negative and positive outcomes, one outcome is that our spending patterns will have most certainly changed. We are currently in lockdown number three, meaning we have spent nearly 12 months of our lives under restrictions in one way or another. One of the positives recorded is an increase in accidental savers over the last 12 months.
The Office for National Statistics records the household savings ratio every quarter. This ratio is a representation of the total amount of net savings as a percentage of the household's disposable income. Since 1987 (when this was first recorded) the highest record level was 29.1% in quarter 2 of 2020, during the COVID-19 pandemic (ONS, 2020).
This has led to many individuals holding more cash in bank current and savings accounts with interest rates that are currently at the lowest point in history. Currently, the Bank of England has set the interest rate to 0.1% (Bank of England, 2021) and the the rate of inflation is 0.7% as measured by the Consumer Price Index (ONS, 2021).As a result, for those people who were earning less than 0.7% interest on their savings actually lost money in real terms, i.e. after taking into account the effect of inflation reducing the value of your money.
Many savers may wish to consider looking for a better return on their savings by investing in a collection of assets, that may provide an overall better return over the long-term.
As financial planners, we encourage our clients to work on specific goals and objectives to ensure that there is a clear reason for why clients wish to invest. This could be as simple as beating inflation, building a pot of money for retirement, or simply utilising tax allowances. We discuss investing for growth or income, or sometimes both, to help formulate amore precise objective.
Investing does not come without risks though and part of the journey we take our clients on ensures that you are only taking a level of risk that you are comfortable with.
Typically, when it comes to investing, risk will be broken down into three key areas:
· Your attitude to risk – this looks at how you react mentally to taking on risk and how you feel about the uncertainty over how much your investment will go up and down by. Once we understand this, we can decide on investments that match the level of risk that you are comfortable taking.
· Your capacity for risk – this is how much risk you can afford to take and feel comfortable with. Your financial adviser will help you to understand how much risk you can afford to take with your investment.
· Your need to take risk – this is how much return you need to achieve to meet your objectives. Once your financial adviser has determined how much return you would need to meet your objectives, we can compare this to the corresponding level of risk you would need to take.
Your financial adviser will discuss your risk profile in significant detail during the course of your journey to ensure that you are comfortable with the level of risk agreed and taken with your investments.
Investing should be viewed as a long-term plan(typically over 5 years) as this provides the timeframe for your investment to recover from any short-term falls in value.
You may have come across the saying 'don't put all of your eggs in one basket' and this is a common approach when it comes to investing too. Spreading risk is one of the most important principles of investing, not only between several different investment types (also known as asset classes) but also between different companies.
By taking this approach, even if a particular asset class or company goes through a bad patch, the rest of your investment need not be affected.
Typically, investments will be held in a wide range of assets (and within those assets a range of companies) but broadly these can be broken down to the following:
· Fixed Interest (bonds)
· Commercial Property
· Equities (company shares)
· Alternative asset classes, such as hedge funds and commodities
A careful balance between these asset classes will produce an overall asset allocation that will be suitable for your risk appetite. Engaging with a financial planner to ensure you have the right asset mix is recommended. Also, reviewing your risk profile and the asset mix of your investment on a regular basis will help ensure that the risk level of the investment does not creep into higher or lower risk categories, and therefore, remains suitable for the level of risk that you are comfortable with.
Before you invest, you should always look at repaying any liabilities such as loans, credit cards, and even mortgages. It is important that emergency funds are in place (see our education page on Emergency Fund) and ensure that you have reviewed your existing financial protection, such as income protection, to ensure you are adequately covered.
The value of investments, and the income that they produce, can fall as well as rise. You may get back less than you invested.