When we hear the word 'risk', our minds often jump to dangerous physical activities or reckless behaviour. Yet according to financial experts, being too cautious with our money might represent one of the biggest gambles of all.
James Bulman, director and financial planner at Smith & Pinching, explains this paradox: "Going for 'low risk' or cautious options still comes with risk." He emphasises that understanding different types of financial risk is crucial for long-term wealth preservation.
The Critical Difference Between Savings and Investments
Many people struggle to distinguish between various financial products. "People get confused by investments and savings accounts," Bulman observes. He clarifies the fundamental distinction between the "asset allocation of a portfolio" and "savings and deposit-based accounts".
While products like tax-free cash ISAs, junior ISAs, and Premium Bonds are popular for wealth accumulation, Bulman notes they're primarily used "as a wrapper for tax benefits, rather than necessarily calling that a low-risk investment." The crucial difference lies in volatility - investments fluctuate with market conditions, while savings accounts generally offer "easy access" or "ways to protect your money against investment falls".
Determining Your Personal Risk Level
Bulman's approach begins with understanding individual circumstances. "The first thing I ask somebody is, 'What are their objectives? What are they trying to achieve?'" he explains. "If you don't have a minimum of three to five years to invest, I do not think you should be investing."
He recommends clients complete a budget planner to assess their financial situation, then ensure they have "three to five years' worth of deposit-based savings, not investments, set aside" before considering market exposure. For shorter timelines, he suggests Premium Bonds (currently offering tax-free returns averaging 3-4%) or utilising the £20,000 tax-free ISA allowance in cash ISAs.
This strategy provides crucial buffer during market downturns. "If you look at historical data, when markets fall, they generally recover within six months, but they can take in excess of 30," Bulman notes, emphasising the importance of having accessible funds to avoid selling investments during unfavourable periods.
Navigating Investment Options and Emerging Trends
The Financial Conduct Authority typically categorises equities and property investments as higher risk, while treating bonds, Absolute Return Funds and Money Market Funds as more cautious options. However, Bulman highlights that these classifications aren't static.
"If you were in bonds at the minute, if you see the volatility that is going on in the market, there could be high correlation with equities," he observes. Currently, he's positioning clients in money market funds for their "reasonable level of stability" and recommends a "well-diversified portfolio" managed through financial advisors or platforms like Hargreaves Lansdown and Flagstone.
Regarding trending investments like cryptocurrency and gold, Bulman urges caution. "If you buy into gold, if the dollar is overpriced, and you purchase that in sterling, you could actually lose quite substantial interest just on currency risk," he warns, noting that gold may be peaking currently.
On cryptocurrencies, he draws an analogy: "Would you be willing to put £1 in that fruit machine and lose it for the potential you could earn a £25 jackpot? I'd never talk somebody out of it, but I would be cautious on timing and can you afford to lose that money?" Unlike traditional investments, cryptocurrency lacks the reassurance that "as long as global markets remain in place and they recover, then so should your investment".
The Importance of Professional Financial Guidance
Bulman strongly advocates for professional advice. "In an ideal world, everybody should be getting financial advice at school," he states, while acknowledging that private financial advice remains unaffordable for many. He recommends free services like MoneyHelper for those who cannot access paid advisory services.
"Everybody should get advice, because everybody's circumstance and wants and objectives are going to be different, and that would dictate how much risk they take and how cautious they are," he concludes, emphasising that understanding your personal risk tolerance is fundamental to financial security in an unpredictable economic landscape.
