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Colin MacKenzie, Director, Investment Management at Arbuthnot Latham & Co., Limited, highlights critical trade-off decisions all investors have to make to enact an effective wealth management strategy.

Opportunity cost is a key concept for investors to bear in mind as they set their wealth management plan, as is accepting that excess risk aversion can be a risk in itself. Making intelligent trade-off decisions in light of your unique circumstances is the core of a good strategy and, crucially, you must revise these as your situation evolves throughout your financial journey.

Opportunity cost illustrated

Opportunity cost, in essence, denotes the sacrificed value of the next best alternative when a decision is made, prompting consideration of trade-offs. An illustrative case involves choosing between investing in the market or repaying a mortgage, each with distinct pros and cons.

Currently, the average rate for a fixed five-year 85% loan-to-value mortgage is approximately 5.19%i, while banks offer approximately 5.30%ii on a one-year fixed term deposit. Comparing these options introduces the challenge of predicting investment performance, which is inherently tied to risk and the associated premium investors expect.

Currently, the average rate for a fixed five-year 85% loan-to-value mortgage is approximately 5.19%,  while banks offer approximately 5.30% on a one-year fixed term deposit

Recent Global events such as Covid, elevated levels of inflation and the resultant rapid rise in interest rates plus geopolitical tensions have all made an impact on asset markets. Uncertainty can drive some investors to favour safer options, repaying costly debt and accepting cash deposit returns. However, the investment landscape is not always entirely bleak.

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Top Tip

Risk aversion is something which comes up often in our conversations with users of our matching service, albeit perhaps not in those precise words. High Net Worth individuals might typically ask how they will know they are taking on sufficient investment risk in their portfolios or if they are potentially costing themselves dearly by holding excess cash.
Those questions need to be explored in depth with a professional adviser, of course. What we can say generally, however, is that a realistic appreciation of risk-return trade-offs is very often missing from DIY wealth management strategies. Wealth managers are able to produce very powerful projections and ‘what if’ illustrations to help investors make the best trade-offs for their profile and needs. Why not take advantage of the conversations with leading firms we can set up fast and free and see which insights you can gain?

Lee Goggin - Co-Founder

Lee Goggin


Potential for threefold returns

In the early months of 2023, banks offered around 4.0% for a one-year fixed deposit, yielding approximately 2.3% interest by July. During the same period, global stocks increased by about 10.6% in GBP terms, surpassing cash deposit returns more than threefold.

Choosing between debt repayment, cash deposits, or investing hinges on individual circumstances, time horizons, and risk tolerance. Despite the potential reward in investing, prudent consideration of debt-servicing costs is crucial. Seeking assistance from wealth planners can tailor financial plans to individual needs and aspirations, ensuring informed decisions that are continuously aligned with long-term goals. Ultimately, the optimal choice depends on one’s unique financial situation and objectives.

Risk-return trade-offs when securing your retirement

Planning for retirement requires foresight to turn dreams into reality. Firstly, underestimating the impact of inflation can be a significant oversight. While incremental price increases may seem inconsequential in the short term, the cumulative effect erodes purchasing power over time. To combat this, investments must outpace inflation, currently at 3.9%iii, to maintain wealth.

Attempting to time the market, often inspired by success stories, is another mistake. Successfully timing the market is difficult to achieve repeatedly – investors are most likely to be better served focussing on time in the market, rather than trying to predict shorter-term rallies and corrections. Seeking professional advice during market volatility is therefore advisable.

Understanding the risk-reward dynamic is crucial. While low-risk, low-return investments have a place for some, those distant from retirement a diversified portfolio with higher-risk, higher-return options is essential for long-term growth.

While low-risk, low-return investments have a place for some, those distant from retirement a diversified portfolio with higher-risk, higher-return options is essential for long-term growth

Determining withdrawal strategies poses challenges. Deciding when to transition from saving to spending varies for each individual, emphasising the need for a personalised plan developed with a retirement wealth planner.

Differentiating between good value and fees is essential. Low fees do not necessarily equate to good value; the latter involves considering the quality of advice, ongoing service and investment management. Exit penalties should also be factored in when assessing the overall value of financial services.
Lastly, not seeking advice can be a significant and costly oversight. Seeking advice from experienced professionals can help navigate potential retirement planning and investing pitfalls.

Important information

The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.

We always advise consultation with a professional before making any investment and financial planning decisions.

Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.

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