Put yourself in the shoes of a football manager. You have to choose between a player who is pretty decent all of the time and a player who is utterly brilliant some of the time, but, at best, very average the rest of the time. Which player do you choose and why? Actually, the answer to that question isn’t necessarily obvious so let’s take a look at when you might want to use the first player and when you might want to use the second.
The consistent player
The consistent player is probably the one you want to use for the vast majority of your matches. This player will allow you to plan ahead in a meaningful way, confident that your plans are highly unlikely to be upset by any nasty surprises. Against a challenging but predictable opponent, the reliability of player one will be far more useful than the erratic brilliance of player two.
Translating this analogy into investment terms, it’s very likely that your most challenging opponent will be inflation, which, fortunately, tends to be fairly predictable, in fact, in the UK, the Bank of England has an inflation target of 2%. Of course, in reality, inflation will not necessarily be at exactly 2% but there is a reasonable expectation that it will consistently hover around that point and hence it can be considered a predictable opponent. Your strategy, therefore, will be to build a portfolio of reliable investments, which, taken together, give you a decent fighting chance of achieving the baseline returns you want, in spite of inflation doing its worst.
The occasionally-brilliant player
What if you’re up against an opponent you know is stronger than your first player? What if your plans have been upset somehow and you’re now playing catch-up in a game you just can’t afford to lose? What if you’re desperate for some real glory instead of just doing OK? In these situations, you may well want to reach for player two, because, realistically, player one just isn’t going to cut it.
Translating this analogy into investment terms, there are two sets of circumstances in which you may want to swallow a bit more risk. The first situation is when you know you’re behind in your investment goals and you know that the only realistic way to get yourself back on track, let alone ahead of the game, is to take a deep breath, let player two loose and hope for the best. For example, if you’ve reached your early forties and haven’t yet taken any serious action regarding saving for your retirement, then you need to get moving and quickly. Alternatively, if you have started investing but really haven’t saved enough, then using player two could give you the push forward you need. The second situation is exactly the opposite, it’s when you have the situation in hand but want a bit more, for example, you’re in your early twenties and you know that if things don’t work out for you this time, you have years to make up the difference, or perhaps you’re heading towards retirement with a decent pension fund, but fancy taking your chances at having a bit more money to enjoy in it.
The lesson to take away
Consistency is key to solid results, but, sometimes taking a bit of a risk can be more than justified. The important point to note, however, is that all your players should be aiming towards the same goal, or, in other words, all your financial decisions should be considered in the context of an overall financial strategy which will help you and your money to reach your targets, whatever they may be.