Risk cannot be eliminated, only mitigated
25th November 2020
You might agree that the ideal investment is one that offers capital security, as well as a predictable, high, and inflation protected return.
If such a product existed then the likelihood is that you would never have become a client of Positive Wealth Creation Ltd.
The investor who seeks capital security to the exclusion of all other factors will still have their original funds in due course. But the purchasing power is likely to have been diminished by inflation, and with interest rates so low, is unlikely to have much income to spend.
The usual course of action is to allocate to cash funds needed in the short-term, as well as a contingency, whilst otherwise proceeding with investments. In this way whilst there is less capital security, over time there is expected to be some inflation protection and some positive return. This is the course of action that identifies all of the risks and seeks to mitigate them, rather than eliminating one risk to the exclusion of all others.
The ongoing pandemic and the current restrictions until 2 December have seen a return to prioritising the risk of Covid to the increasing exclusion of other risks. Stopping the spread of Covid through locking down once again augments the risks to the population from other untreated health conditions, poor mental health, less education, as well as damaging the economy.
The World Health Organisation is clear that these measures disproportionately affect disadvantaged groups and that the primary purpose of lockdown is to buy time. The time needs to be used wisely to build test and trace, quarantine and other medical capacities. Yet, the argument for the most recent lockdown seems to be that without it the NHS will be overwhelmed. The implication is that without this action now both Covid and non Covid patients could be untreated.
The world’s biggest killer remains poverty and so through the Summer months the Government message was to promote the economy over other risks. A University of Warwick study concluded that August’s ‘Eat out to help out’ scheme caused a cluster of virus transmission spikes. However, this economic focus diminished the strength of the message of social distancing. Until the vaccines developed are rolled out at scale, this remains the most powerful action to prevent transmission. Returning children and students to educational settings appears to have further compromised this defence.
In the aggregate, the balancing of the various pandemic risks is very fluid and proving troublesome to manage nationally. The human factor of whether ever changing rules about Covid are understood, yet alone followed, is a similar dynamic to our management of client financial behaviour such as during the volatile markets at the start of the pandemic. The way forward for dealing with the pandemic as well as its impact on finances in the short term must remain ongoing attention to all risks and mitigating them rather than seeking to eliminate just one risk.
We have taken steps to mitigate the risk to you and our colleagues. With various changes to our office layout, the use of screens, masks and visors, continuing to support out of office working, and delivering content online, we have been able to promote social distance whilst allowing greater in person contact since July.
There are just 21 working days until we close for our Christmas break so this is your call to action:
- This month those with deposits with National Savings face noticeable cuts to interest rates. Income Bond holders in particular should consider redirecting their funds.
- Shorter-term investors who this year or next have capital requirements that are not known to us or who owing to the circumstances are re-assessing plans such as bringing forward retirement still need to be in contact with us.
- If income exceeds expenditure, consider reducing withdrawals from pensions and investments, or if secure cash deposits are sufficient, to reinvest surplus.
- Recovery in asset prices since March lows means that a diversified portfolio will not show terrible returns so no need to be scared of looking;
- Fail to plan, plan to fail: forward planning for the new circumstances remains vital to establishing and achieving personal and financial goals;
- Spending review and early 2021 Budget likely to change the financial landscape because of the need to pay for the pandemic support packages put in place, so get ready, particularly following Office for Tax Simplification Capital Gains Tax report;
- As usual, we have published our usual monthly commentary to give you a further update.
Please make contact if you wish to discuss your situation. We send our best wishes to you and your families during the latest restrictions.