LOWER RETURNS BUT LIMITED LOSSES – WEIGHING UP RISK AND RETURN
In conclusion, it will come as no surprise to hear us say that there is no golden bullet. It is always possible to achieve additional return but this inevitably involves extra risk. It is essential to identify that risk; even though it hasn’t been prevalent recently, it doesn’t mean it has disappeared altogether. Sometimes it is better to acknowledge that losing 1% or 2% a year in real terms might be unappealing but it is still significantly better than losing 10% or worse still, being unable to access your money at all. Whilst it may come as a surprise to watch European investors soak up large volumes of short-term bonds issued with negative yields, perhaps the reason they are willing to pay this price is knowing that their losses are limited.
It is arguably more important than ever to forecast your cash requirements as much as is possible over the next few years. Understand your timeframe and speak to your investment manager about the different solutions available to you. If you can take a little more risk, it might well make sense to do so, but in the knowledge that we are at a dangerous point in markets given how low interest rates and bond yields have fallen. Should bond yields rise more quickly than investors expect, those investing with too much duration for their liquidity needs could get caught out. As ever, it is a fine balance between accepting the negligible returns from safer assets (cash and short-dated government bonds) or pursuing higher returns from riskier asset classes (long-dated corporate bonds and equities) and risking the possibility of losing precious capital.
Today more than ever, what to do with shorter-term monies requires meticulous cashflow planning.
