What does safe mean to you?

3rd June 2016

I had a meeting last week with a new client. Like me Ian works in the “retail financial services” space, however he is a General Insurance Broker rather than a Financial Planner.

As our conversation progressed it became clear that we are (to paraphrase George Bernard Shaw) two professionals divided by a common language.  For example we both talk to our clients about risk but the word means very different things in the context of general insurance and investment.

This division became even more apparent when Ian asked me if I could recommend “safe” investments.  Now the dictionary definition for “safe” is:

  1. Protected from or not exposed to danger or risk; not likely to be harmed or lost.
  2. Not likely to cause or lead to harm or injury; not involving danger or risk.
  3. A strong fireproof cabinet with a complex lock, used for the storage of valuables.

I get the third one but the first two use other words that also need defining, “danger”, “risk”, “harmed” all of which will also be used by different people to mean different things.

Ian’s question was neither unusual nor unexpected. Clients (and new clients in particular) often ask about safe investments, a safe home for their money, a safe harbour, a safe return.  However there is no easy answer because nothing in our volatile world can be really called safe.

So what did I do when Ian said that he wanted safe?

The first job was to find out what Ian really meant; what are the aspects of safe that are important to him?

The next step was to help him understand that there are only degrees of safety when it comes to investment.  An asset that is protected against one type of risk may be vulnerable to another.  I explained the risks associated with the typical investment “building blocks”:

  • Cash – money “under the mattress” was often considered safe in the past but is at risk of being lost, stolen or destroyed. Deposits in the bank are still considered by many to be a safe harbour; however there is a risk of an insidious loss in value because the long term buying power of the money is usually reduced by inflation.
  • Property – benefits from semantics (safe as houses, property ladder) but there is no way property is actually safe; values can fall as well as rise, tenants can do damage and a house does deteriorate with no attention so maintenance can be a big cost. One would expect that, over the long term, property in general will maintain its real value or even beat inflation, a particular property may not – think location, style and condition.
  • Gilts – these are backed by the UK Government and are as safe as a Government can be. The index-linked version also provides strong inflation protection. However they are not all that easy to buy and, unless you buy at outset and hold to maturity, the safety is compromised by changing interest rates, which cannot be predicted in advance.
  • Shares – can provide fantastic returns, on the other hand you can lose all your money. Risk of loss can be reduced by diversification (i.e. buying a portfolio of shares or a fund).  Even a diversified portfolio is likely to be volatile – particularly over the short term.

By the end of the meeting Ian understood that the different building blocks can be mixed and matched in to create the returns that he needs.  He will never have a “safe” investment, because there is no such thing, however he does have a better understanding of:

  • the risks he is taking on
  • why he is taking those particular risks
  • how the portfolio will deliver the returns he needs to meet his goals

Because of this he feels much more confident about the decisions he will need to make as we continue to work together to develop his Financial Plan.

Give myself or Neil a call if you would like to discuss what safe means to you.