To be honest, there isn’t a time to invest with caution and another to invest with abandon. Investing should always be undertaken according to your time horizon and your attitude and ability to lose your savings.
Risk is the possibility that your investment could fall in value as well as rise. All investments carry degrees of risk. Risk drives the returns that we hope to make. When you are looking to make an investment to see a return, you need to accept the possibility you could leave the process with less money than they started.
So, managing risk, is as important as your investment strategy. We look at what’s in store for your money in 2017 to help you find a fund investment strategy investment strategy in this piece, you can read it by clicking here.
In this blog, we are going to look at managing your risks, and especially those we are likely to see in 2017.
As we saw repeatedly in 2016, politicians can be the biggest risk to market volatility. It has become impossible to forecast what they are going to say or the outcome of their elections. Only a few weeks ago, President Trump dented the share price of Boeing, the largest aerospace manufacturer in the world, by haggling over the price of the new presidential jet, Airforce One, via Twitter. And remember how both Brexit and the US elections were called incorrectly by pollsters.
Despite Mr. Trump’s maverick approach, the real wild card for 2017 will be European elections in France, the Netherlands, Germany and Hungary. With a clear anti-establishment mood and rising sovereign debt, you should be vigilant about investing in European assets in 2017.
Interest Rate Risk
In the U.S., the economy was expanding at a 3.2% annual pace in the third quarter of 2016, its fastest rate in two years. The job market is also doing well, with the jobless rate dropping to a nine-year low of 4.6%. So, it was no surprise that interest rates were raised by the Federal Reserve in December.
When interest rates rise, borrowing becomes more expensive. The interest rate on a 10-year US government bond soared from 1.75% the day before Donald Trump was elected to 2.4%, the day after. That’s a big jump in the world of fixed income products, like bonds.
As the US economy strengthens and more people are in work, inflation will start to increase, to counter that, the Federal Reserve will increase interest rates further towards its target rate of 2%. The question is how quickly it will move rates upward in the coming year and how high it will allow inflation to rise.
The Federal Reserve has to tread carefully because every move it makes has a ripple effect on markets both in the US and internationally. A rising US Dollar could hurt other currencies and move bond markets, affecting borrowing around the world.
The risk that the value of an investment held in a foreign currency falls as a result of a change in the exchange rate, is called currency risk.
Investors have seen good growth in the value of FTSE companies as the Pound fell against the Dollar and Euro in the last half of 2016. This is because around 4 out of 5 companies that have shares registered on the FTSE index derive large portions of their income from aboard. The weak Pound means those profits increase in value when converted from stronger currencies and the shares cost less to buy for overseas investors.
There is no reason to believe the Euro won’t stay in 2017, however, if the political risk we covered at the start of this blog starts to come into play, particularly with Euro-sceptic politicians winning power in the European elections, the Euro could start to lose value. That will make the US Dollar stronger, especially if interest rate increases continue, and the difference in value with the Pound could reduce.
That would reduce demand for UK exports in Europe and could lead to a slowdown in the economy, knocking the value of those companies that export and have been driven up on the FTSE.
The weaker Pound means that goods bought overseas become more expensive in the UK. We have seen inflation start to arrive in the UK with the price of fuel and it could start to affect the cost of food and other goods in 2017.
Savings need to keep pace with prevailing inflation or you will in effect be losing money in real terms. This is often considered the risk of not investing because if you leave money in a bank account paying interest at a rate below inflation, you are effectively losing money.
The Bank of England currently forecast inflation to reach 3% by the end of 2017. If that forecast is accurate, then you should expect to see the Bank of England under pressure to start raising interest rate towards the end of 2017. That will increase the cost of borrowing, so if you have a mortgage, you should think about getting a fixed rate mortgage.
If you have savings, you should make sure you have a savings account paying the best returns, without a long tie in, so that you can easily make the most of moving into higher rewarding accounts as they become available.
These are just a few of the risks associated with saving and investing. Some of them can be anticipated and present themselves with common regularity. Others are completely unpredictable.
If you would like to make sure your investments are held in assets that are suitable for the risks we have covered here, if you want to make sure you’re getting the best interest on your savings or want to fix your mortgage before interest rates go up, we’re ready to help you.
Even if you don’t need to make any immediate changes, contact us today for an initial consultation.
Past performance should not be taken as a guide to future returns and whether you are investing in active or passive funds, you may get back less than you invested.