|In praise of flexibility. It is
worth more than you think.
'Hanging Loose' means keeping your options open.
It means staying flexible. It means being able to change your mind.
It means being able to correct your mistakes.
So does it matter much?
It's hard to be generically helpful about flexibility. Sometimes
it matters and sometimes it doesn't, and that depends on you, your
financial circumstances and your financial objectives. But we suspect
you undervalue it.
A comparison to make you think
- How often have you put money away for one
year to gain an extra ¼% interest and found you needed the money
unexpectedly and had to borrow on your credit card?
- Are you trapped in a closed insurance fund? £160
- Do you have some other insurance product
bought in a fit of enthusiasm a few years ago that you cannot
now get out of?
- Do you have a regular savings plan that you
want to change?
- Have you been pumping money into a pension plan
for years, grateful for the tax relief and shrugging your shoulders
at the the high charges, and now face having to buy an annuity
at stupid rates?
A 5-year fixed-term fixed-rate bank deposit is
very low risk in money terms. You know exactly what you are going
to get in income and your capital risk is negligible if you are with
a major bank.
But is it really such a good deal for you?
- You are stuck for 5 years.
- You are at the mercy of inflation.
- If you need the money unexpectedly (the roof
blows off or you lose your job or your daughter gets married)
you can't get at it.
- If interest rates rise (perhaps in response
to higher inflation) you cannot respond.
- If your bank loses a squillion pounds in
uncontrolled speculation and grandiose acquisitions then maybe
it is not so safe any more?
- Compare that with buying shares.
They are supposedly much more risky. But they are about as flexible
as you can get - one click of the mouse and you're in, one more
click and you're out. However your circumstances change, you can
react to it.
Are you sure they are more risky, for
you, than a 5-year deposit?
This means the ease with which you can turn an investment into cash.
It is vital for investment flexibility.
- Large company shares are very liquid.
- Small company shares are not quite so liquid.
- Property is not very liquid.
- Works of art are illiquid.
Liquidity tends to disappear when you most need it.
If the bottom drops out of the buy-to-let market it will be extremely
difficult to sell buy-to-let properties.
The value of flexibility is most familiar in the context of borrowing.
A fixed-rate mortgage with an early-repayment option is clearly
more valuable than one without. Not just because of the capital
flexibility. But because in the former case you have a second (or
more) bites at the interest rate cherry. If rates go up you stay
with it. If rates go down you re-finance.
Do not confuse variable interest rates with flexibility.
'Hanging Loose' allows you to change
what you are doing at your
option. Interest rate changes are something that the market imposes
on you, not something that you do to the market.
To sum up
'Hanging Loose' is actually a way of reducing risk. It allows you
to ride life's punches more easily and makes it more likely that
you can meet your personal objectives.