Duke,
It was an interesting journey to get here.
I understand your position and i hear it every day.
In seeking to avoid volatility in capital markets many investors hold considerable deposit based accounts and State Savings. Many rationalise, as you yourself do, that in return for some peace of mind (which again you correctly identify as a utility effect) that they are prepared to accept a creeping loss of purchasing power since over short periods of time the impact is not significant enough to cause any real concern.
Especially if one contrasts this creeping loss with the daily market gyrations then there is really no contest - cash is king.
This position is currently compounded by the comparatively low level of official inflation and unsustainably high nominal interest rates on offer from Irish Banks -itself a manifestation of default risk but not something our overconfident saver needs to concern themselves with because as we know the downside risk is remote and anyway the ELG will step in to bail us out if we get into trouble. This is probably true for deposits up to 100k, I'm not so sure for larger amounts.
But isn't this the exact same overconfidence situation I described at the start of this thread?
Savers often choose to treat the downside risk as impossible rather than extremely remote and in doing so fail to appropriately diversify against avoidable risks.
The Sandler review in the UK called this state of mind "reckless conservatism"
The same is true of all the arguments regarding the risk of inflation for savers. It's a very small risk so it is safe for me to conclude I can ignore it.
Lets imagine that we all know today we will have enough saved up to see us through to an average life expectancy. No concerns about interest rates or inflation. I have created a world where an average saver can be guaranteed sufficient money not to worry.
Under these conditions, again why would anyone take any risk? The answer of course is that half of us will not live an average lifetime. In fact by definition half of us will live longer than average. This is simple longevity risk and we know that we tend to underestimate longevity risk by a considerable margin. No best before date on your birth certificate - which makes budgeting a bit tricky to say the least.
These are all just manifestations of the same problem. It just simply can't be possible for all of us to have a risk free life. Some of us may be wealthy enough to maintain our desired standard of living without taking investment risk but in my experience it is a very small minority and in practice they are really making a decision conscious or unconscious to reduce the prospective inheritance for their heirs. Which is fine if that's what really matters, but again in my experience that isn't the most important decision for many families.
As in so many things in life it's important to get the balance right between our need, willingness and capacity for investment risk. There is no right or wrong answer here. Objectively need (as we have discussed here) and capacity should dominate but as you have demonstrated we are emotional beings and we let willingness dominate.
For me this is the key benefit of working with an adviser- accountability. I can't be objective about my own emotions and so I have a financial planner to hold me accountable for my decisions.
It was an interesting journey to get here.
I understand your position and i hear it every day.
In seeking to avoid volatility in capital markets many investors hold considerable deposit based accounts and State Savings. Many rationalise, as you yourself do, that in return for some peace of mind (which again you correctly identify as a utility effect) that they are prepared to accept a creeping loss of purchasing power since over short periods of time the impact is not significant enough to cause any real concern.
Especially if one contrasts this creeping loss with the daily market gyrations then there is really no contest - cash is king.
This position is currently compounded by the comparatively low level of official inflation and unsustainably high nominal interest rates on offer from Irish Banks -itself a manifestation of default risk but not something our overconfident saver needs to concern themselves with because as we know the downside risk is remote and anyway the ELG will step in to bail us out if we get into trouble. This is probably true for deposits up to 100k, I'm not so sure for larger amounts.
But isn't this the exact same overconfidence situation I described at the start of this thread?
Savers often choose to treat the downside risk as impossible rather than extremely remote and in doing so fail to appropriately diversify against avoidable risks.
The Sandler review in the UK called this state of mind "reckless conservatism"
The same is true of all the arguments regarding the risk of inflation for savers. It's a very small risk so it is safe for me to conclude I can ignore it.
Lets imagine that we all know today we will have enough saved up to see us through to an average life expectancy. No concerns about interest rates or inflation. I have created a world where an average saver can be guaranteed sufficient money not to worry.
Under these conditions, again why would anyone take any risk? The answer of course is that half of us will not live an average lifetime. In fact by definition half of us will live longer than average. This is simple longevity risk and we know that we tend to underestimate longevity risk by a considerable margin. No best before date on your birth certificate - which makes budgeting a bit tricky to say the least.
These are all just manifestations of the same problem. It just simply can't be possible for all of us to have a risk free life. Some of us may be wealthy enough to maintain our desired standard of living without taking investment risk but in my experience it is a very small minority and in practice they are really making a decision conscious or unconscious to reduce the prospective inheritance for their heirs. Which is fine if that's what really matters, but again in my experience that isn't the most important decision for many families.
As in so many things in life it's important to get the balance right between our need, willingness and capacity for investment risk. There is no right or wrong answer here. Objectively need (as we have discussed here) and capacity should dominate but as you have demonstrated we are emotional beings and we let willingness dominate.
For me this is the key benefit of working with an adviser- accountability. I can't be objective about my own emotions and so I have a financial planner to hold me accountable for my decisions.