Is caution always wise when it comes to investing?

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Most people take a 'safety first' attitude to investing with just one in 20 'taking risks'

Two out of five people shun investment risk at all costs and are at risk of falling into the trap of 'reckless caution', new research reveals.

Most prefer the safety of cash earning them less than 1 per cent, although the return on stock market investments is more than 5 per cent a year over the long term, according to financial firm Aegon.

The biggest factor affecting attitudes was concern about making a wrong decision, followed by the need to take risk to get good returns, having to keep informed about markets, and recent experiences of losing money.

Investing is not suitable for everyone, especially if your finances are in an insecure state or you have spending goals that don't allow you to tie up your money for at least five years, and ideally longer.

The Aegon study comes at a time of market turmoil which could turn some people off investing, especially as high volatility is expected around the Brexit date in March. 

However, investing pundits reckoned the market carnage as politicians remain deadlocked over Brexit makes this a great time to buy UK stocks on the cheap in their forecasts for 2019. 

Some predicted the UK could be the top global performer in the year of Brexit. 

Aegon said 'reckless caution' means some people are exposing their money to stagnation and putting it at risk of falling well below the rate of inflation.

Its study found:

  • Some 41 per cent of UK adults avoid investment risk at all costs
  • And 56 per cent said their risk appetite was low or zero, preferring minimal potential losses with modest gains
  • Only 6 per cent reckoned their family and friends would describe them as a risk taker
  • Some 12 per cent are more cautious now than they were a decade ago, while 7 per cent said that their willingness to take on risk had increased in that time
  • Among those who are more risk-averse now, 31 per cent are nervous about the global economy, 24 per cent are concerned about another financial crash, 19 per cent are more cautious due to past losses, and 12 per cent are unsure of the best investment strategy to adopt.

Nick Dixon, investment director at Aegon, said: 'Regardless of the current turbulent political and investment landscape, failing to take measured risk is not prudent.

'Over the long term, reckless caution is the biggest risk of all. Our research shows that the majority of UK consumers are exposing their money to stagnation and putting their assets at risk of falling well below the rate of inflation.'

He added: With careful analysis, both [financial] adviser portfolios and multi-asset funds can be constructed to meet specific risk and return objectives.' 

Can you afford to invest?

We take a look here at what amount of seed money is ideal, how long you should be prepared to lock it away, and what the general state of your finances should be before you take the first steps into the world of investing. 

Economist Ian Bright, a behavioural investing expert and managing director of group research at Dutch bank ING, always offers what he calls 'boilerplate advice' to would-be investors.

This is that investing is risky, you should ensure you are financially secure before you start, and you should only invest what you can afford to lose.

'Have an emergency fund, pay your bills, make sure your pension is looked after,' he says. 'Being a good personal investor is not about being a good investor, it's about doing the basics.'

Some people have less money available to do all this and then have some left over to invest.

 

This article was written by Tanya Jefferies for This is Money (Daily Mail) and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.