Cash Clinic: Before investing, take time to work out your attitude to risk

Q I am 60 years old and hoping to retire in the next three or four years. However I am getting a bit concerned about how I will support myself in my retirement. The returns on my savings are currently very low so I am tempted to use stock market-based investments to get more growth on my money. Do you think I should put all my savings into the stock market or a portion, or should I not pursue this option at all? Any advice you can offer would be much appreciated.

Christian Poziemski

NW, Perth

A The question of whether you should invest some of your savings in the stock market environment depends on a number of issues, namely, the overall investment period, your personal attitude to investment risk and any anticipated future expenditure that may need to be funded from your savings.

Typically, the minimum investment period for stock market investments is anywhere between three and five years or more. A longer-term horizon is recommended because of the inherent volatility associated with equity investments - the longer the term, the more the fluctuations can be smoothed out over the holding period. It will also give the investment the maximum chance to accrue in value.

Volatility and a potential drop in value can make people feel anxious about investing in the stock market, especially when they are close to retirement and have limited ability to top up the savings.

There is a perception that money is safe at the bank, further enhanced by the Financial Services Compensation Scheme guarantee on deposits up to 50,000. However, low levels of interest and rising inflation gradually erode the value of deposits over time, resulting in a negative real rate of return. Whilst your investment amount will not drop in value, the purchasing power will erode.

Bank accounts are important as they provide liquidity and access to money. They can, moreover, add an element of stability and diversification to an investment portfolio for precisely the reason that they do not fluctuate in value.

As stock market investments have historically outperformed cash returns, investing part of your savings into a well-diversified portfolio is commensurate with your investment objective.

Investment risk and your personal attitude to risk needs to be assessed before putting together a suitable portfolio that provides you with the best possible risk-adjusted rate of return. The level of risk you are prepared to expose yourself to will determine the overall investment strategy, i.e. how much of the investment amount will be invested in which geographical market or asset class.

Bearing in mind your relatively short to medium term investment horizon and specific investment objective, I would advise erring on the side of caution in exposing yourself to higher risk investments.A diversified portfolio made up of fixed interest investments, such as government and corporate bonds coupled with higher yielding equities could be appropriate.

As with any financial planning issue it is important to seek independent advice from a qualified adviser when making investment decisions.

• Christian Poziemski is a wealth manager within the private client and financial services department of HBJ Gateley Wareing.

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