A “margin of safety” gives you a cushion to allow for losses or inaccurate assumptions in your financial plan. It could mean your goals remain on track, even if things don’t go exactly as you expect.
British-born American economist and investor Benjamin Graham is often referred to as the “father of investing” after he wrote two founding texts about investing in the 1930s and 1940s.
The margin of safety is one of Graham’s key principles, so what does it mean?
In simple terms, it’s the difference between the intrinsic value of a stock and its market price. The idea is that you should only buy stock when its worth more than its price on the market.
The key benefit of the margin of safety is that it allows for some losses to occur without having a huge negative effect on your portfolio.
The margin of safety could be applied to other areas of financial planning too.
The idea of creating a cushion to account for mistakes or provide you with a buffer in case the unexpected happens isn’t only useful when you’re investing.
A margin of safety could be useful when you’re making long-term plans too by providing you with security even if things do not go exactly as you expect.
If you would like a review of your pensions and investments and whether you are on track to achieve your financial goals, please contact us for a free consultation. T: 0117 959 6499; E: info@perennialwealth.co.uk; Trym Lodge, 1 Henbury Road, Bristol BS9 3HQ
