Money Matters

Risk & Reward

David Foot writes exclusively for The Whistler

By the time you read this, the dust will have settled on the subject of the General Election, and we should have some idea of the financial plans of whatever Government we have to endure. Irrespective of the outcome, we will probably end up paying for the profligacy of the last few years. In the week of my writing this article, we have seen the televised debate, between the party leaders, on the economy, and the announcement of hugely increased profits from Lloyds TSB. I must say that I was most surprised that no mention has been made of the potential profits from the Banks in which we are all now stakeholders. These Banks should be paying for their own ‘bail-outs’, not the great British public. The Government (rightly, I believe) stepped in to avoid the potential cataclysmic meltdown of the financial system, and took the risks. The rewards should return to the Exchequer, and benefit us all.

This brings me to the subject of ‘risk and reward’. Broadly, the main risks are those of inflation and market risk. There is also the possibility of criminal risk negligence, fraud and theft, but these are, thankfully, somewhat remote. Inflation has not been as much of a problem in the last decade or so, as it was for much of the previous twenty or more years, and despite there not being too much concern amongst economists and fund managers, inflation has risen a little, and currently poses somewhat of a risk to your capital ‘enjoying’ the current short-term interest rates. There has long been a ‘Holy Grail’ of beating inflation in order to actually increase capital, rather than having its spending power eroded over the course of time. Those people who had savings in the seventies and saw the true value of their money decreasing by double-figure percentages each year, may still carry those unhappy memories with them!

The usual safe homes for capital tend to be high street ‘cash type’ accounts, and National Savings, with the latter offering regular issues of inflation-linked saving certificates, that will guarantee the return of capital, plus an amount equivalent to inflation over the term of the certificate. The only real risk of such products is the potential failure of the Government to repay your capital. This risk was always considered to be practically non-existent, although the recent worries about the Greek economy and the down-rating of its credit have caused some eyes to turn upon the UK, and although the risk of non-payment is still very small indeed, this risk is perceived to be higher than it has been in the past. With all the major political parties stating their intention to keep the UK in a low-inflation environment, it would seem that it should not be too significant a risk over the next few years, although circumstances may take the matter out of the hands of whatever government we have.

As this brings me conveniently round to where I started, I’ll wind up here, and look at the subject of market risk in the next issue. The summer is a-coming, see you then.

Categories: Money Matters

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