Much of our financial planning expertise is captured in the word “risk”.
The word is misused endlessly in financial planning. To us risk is, and can only ever be, the permanent loss of capital.
There are two types of risk – fast and slow. Both can lead to permanent capital loss.
The most obvious “fast risk” is a stock market plunge – it’s usually sudden, shocking and accompanied by screaming headlines and many “told-you-so’s”. Still, this can only lead to permanent capital loss if you sell investments at a loss.
And the only way that is possible is if you panic. If the plunge comes as a surprise, you are more likely to panic. Therefore we keep reminding you to expect sudden falls.
“Slow risk” is insidious – it kills us slowly, unerringly. The obvious “slow risk” in financial planning is inflation. It nibbles away at the value of money every year. At 3% pa (the UK long term average), inflation halves the value of £1 in 20 years.
Holding cash means you avoid fast risk but guarantees you a slow death.
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