I recently disinvested a number of investment bonds that have performed badly. The exit penalties were not severe and the money is now in cash in my bank account. I expect to use this money to generate extra income in retirement in five years time. Now the cash is in my account I am reluctant to reinvest it. Am I being too cautious?
It is perfectly normal to be cautious after you have had a less than positive investment experience. However, it pays to analyse why what happened did. Think about why you made the investment decisions in the first place.
You seem to have a pretty certain goal for the money, which is to generate extra income in retirement. Although I wonder how certain that goal is. Is it Smart (specific, measurable, achievable, realistic and time-bound)? Did you take advice when you invested?
We often find clients need help in determining what their goals are and the degree of precision that can be articulated often helps to ensure the wrong investment decisions are avoided. That is not to say a wrong decision is one where the value of the investment falls. That is perfectly normal with certain types of investment.
You are specific in your claim that the bonds performed badly, by which I imagine you mean they were worth less when you disinvested than when you paid in. Or perhaps you achieved relatively little profit on the investment.
With just five years to go until you need to generate income, you may feel that to take further investment risk now would be wrong. However, while it is only five years until you retire, the period of retirement that you face might be significantly longer – 10, 20 or 30 years plus.
You might therefore consider that the investment term for your money is much greater than the relatively short period until retirement.
If you really are nervous about actively investing your money, my advice would be not to do so. However, you need to recognise the consequences of keeping your money in cash as that is not without risk.
Leaving aside the institutional risk (I am sure you will spread your money around various unconnected accounts to get maximum protection from the Financial Services Compensation Scheme), you need to consider two other key risks.
First, inflation will erode the purchasing power of your cash savings. This is particularly true when interest rates are low but it is more noticeable over time. Inflation is something that becomes more noticeable over longer rather than shorter periods of time.
Second, if interest rates remain low, or rise in the shorter term but fall again in the long term, the income generated will be insufficient for your future needs.
Your decision is also going to be influenced by the other retirement income you receive. If you are looking forward to receiving a secure and reasonable level of retirement income, say from pension arrangements, you may be less inclined to take any risk with this cash simply because you do not need to.
Alternatively, and somewhat contradictory to my previous statement, the availability of other secure income probably means you can afford totake more risk.
I think you should seriously consider paying a financial planner to do some work for you around your lifetime cashflow position. This might help you to identify if you need to invest or not.
Nick Bamford is chief executive of Informed Choice