Hanging Loose

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.

  • 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 billion is.
  • 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 comparison to make you think

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 holding shares. They are supposedly much more risky. But they are about as flexible as you can get - one visit to your online brokerage account and you have your sale proceeds in a couple of days. 

Are you sure that shares are more risky, for you, than a 5-year deposit?

Liquidity

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.
  • Not-quite-top-drawer 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.

Repayment options

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.

And flexibility can be a complicated beast. Student loans for example. Not really loans at all, more like a tax, but clear winners in the flexibility contest.

Variable rates

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.