Protecting investments

There is no such thing as a risk-free investment, but you can take steps to minimise the risks associated with saving for the future.

Not the modern way to protect your assets
There is no such thing as a risk-free investment, but you can take steps to minimise the risks associated with saving for the future.
One thing is certain about investments; if there is to be any chance at all of making a profit, there is bound to be some risk.
This falls into a number of categories, not least of which is that if the growth rate is lower than inflation - which applies to most savings accounts - then the real value of your money will be falling.
In practice, the risk that most investors are concerned about is the risk that their money will disappear - in part or entirely - or, to a lesser extent, that their chosen investments will perform less well than some of the alternatives that they might have selected.
How to avoid losses
You can only avoid the risk of losing your money completely by investing in assets that offer little chance of reward - basically deposit accounts that are protected by the Financial Services Compensation Scheme; of which more later.
Since with-profits investments - which offered investors guaranteed returns (plus accrued bonuses) on a fixed date in the future - became less popular, it has been difficult for investors to invest in assets that do not include the risk that some money will be lost. Some investments use what are called derivatives (technically “call” and “put” options that enable the fund manager to more or less guarantee the value of assets on a fixed date in the future) to provide some degree of certainty over eventual returns. These, however, involve what is called a counter party risk; that is that the person at the ‘other end’ of the option agreement may not be solvent when the time comes.
A more practical approach
For many investors, thinking carefully about how and where they invest is more likely to provide a degree of ‘protection’ against poor investment decisions. By investing in a range of different assets, you do not guarantee that the value of your investments will not fall, but rather give yourself the chance that, if some do perform weakly, others will do better. This means that, even if you miss out on the benefits of having selected only the ‘best’ performing asset, you should also avoid the downside of having selected only the ‘worst’ performing investment class.
Spreading the risk
Spreading risk can be achieved in a number of ways including selecting funds that invest in different types of companies, or that focus on various parts of the world. You can also consider investing in property - including commercial property, which has the benefit of not being residential, like your own home - and even physical gold. This latter asset class can potentially perform strongly during periods when shares do not, but include special risks including storage and transaction costs.
The Financial Services Compensation Scheme
As a longstop form of protection, the Financial Services Compensation Scheme protects the first £85,000 of savings that you have with a bank or building society. In relation to investments, it also provides up to £50,000 per person per firm, should the firm go into default. This is not the same as simply having made poor investment decisions but relates to the inability of the firm to meet its obligations. However, this applies only to firms regulated by the Financial Services Authority; which includes all financial advisers, banks, insurance companies and investment firms that are authorised to operate in the UK. If you are in any doubt about whether a firm is regulated, you should visit: www.fsa.gov.uk/register/home.do.
It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact SDB Strategic Planners Ltd. The value of investments is not guaranteed; you may get back less than you put in.
NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THIS ARTICLE IS BASED ON OUR CURRENT UNDERSTANDING OF LEGISLATION, WHICH CAN BE SUBJECT TO CHANGE. THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.

One thing is certain about investments; if there is to be any chance at all of making a profit, there is bound to be some risk.

This falls into a number of categories, not least of which is that if the growth rate is lower than inflation - which applies to most savings accounts - then the real value of your money will be falling.

In practice, the risk that most investors are concerned about is the risk that their money will disappear - in part or entirely - or, to a lesser extent, that their chosen investments will perform less well than some of the alternatives that they might have selected.

How to avoid losses

You can only avoid the risk of losing your money completely by investing in assets that offer little chance of reward - basically deposit accounts that are protected by the Financial Services Compensation Scheme; of which more later.

Since with-profits investments - which offered investors guaranteed returns (plus accrued bonuses) on a fixed date in the future - became less popular, it has been difficult for investors to invest in assets that do not include the risk that some money will be lost. Some investments use what are called derivatives (technically “call” and “put” options that enable the fund manager to more or less guarantee the value of assets on a fixed date in the future) to provide some degree of certainty over eventual returns. These, however, involve what is called a counter party risk; that is that the person at the ‘other end’ of the option agreement may not be solvent when the time comes.

A more practical approach

For many investors, thinking carefully about how and where they invest is more likely to provide a degree of ‘protection’ against poor investment decisions. By investing in a range of different assets, you do not guarantee that the value of your investments will not fall, but rather give yourself the chance that, if some do perform weakly, others will do better. This means that, even if you miss out on the benefits of having selected only the ‘best’ performing asset, you should also avoid the downside of having selected only the ‘worst’ performing investment class.

Spreading the risk

Spreading risk can be achieved in a number of ways including selecting funds that invest in different types of companies, or that focus on various parts of the world. You can also consider investing in property - including commercial property, which has the benefit of not being residential, like your own home - and even physical gold. This latter asset class can potentially perform strongly during periods when shares do not, but include special risks including storage and transaction costs.

The Financial Services Compensation Scheme

As a longstop form of protection, the Financial Services Compensation Scheme protects the first £85,000 of savings that you have with a bank or building society. In relation to investments, it also provides up to £50,000 per person per firm, should the firm go into default. This is not the same as simply having made poor investment decisions but relates to the inability of the firm to meet its obligations. However, this applies only to firms regulated by the Financial Services Authority; which includes all financial advisers, banks, insurance companies and investment firms that are authorised to operate in the UK. If you are in any doubt about whether a firm is regulated, you should visit: www.fsa.gov.uk/register/home.do.

It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact SDB Strategic Planners Ltd. The value of investments is not guaranteed; you may get back less than you put in.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THIS ARTICLE IS BASED ON OUR CURRENT UNDERSTANDING OF LEGISLATION, WHICH CAN BE SUBJECT TO CHANGE. THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.

< Back