Asset classes to suit your risk

As the saying goes, a journey of 1,000 miles begins with a single step. Deciding to invest is the first step of the investment journey, but in the context of 1,000 miles, it's a pretty small one.

Choosing which assets to invest in is, by comparison, a much bigger decision, and with a huge range on offer, it's important to get to grips with each asset type.


At the safest end of the spectrum are bonds. These are loans made to either governments or companies. In return, they pay you a fixed rate of interest and agree to pay the loan back at the end of a set period.

As a general rule, the more risky the loan's considered to be, the more interest you'll be paid on it. UK government bonds, or gilts, are generally considered the lowest risk – as the UK government is very unlikely to fail. Other governments, however, are less secure.

Loans to big, reliable, blue-chip companies with good products and relatively strong balance sheets are next along the risk spectrum, and are known as investment-grade bonds.

Loans of this sort will pay slightly more interest than those to governments, as they are deemed to be more risky.

Further along the scale come less well-established or well-resourced companies, which are considered somewhat less secure.

The higher the risk that the firm will default or fail to repay its debt, the more interest it will have to pay to persuade people to lend money to it.

Riskier companies issue what are known as high-yield or junk bonds – there's a huge range of risk with these.


Also relatively low on the risk spectrum is commercial property. This involves buying properties such as warehouses, shops and offices, which are then rented out to businesses.

Traditionally, this is a reasonably pedestrian investment. You may enjoy small rises in the underlying value of the property, but the focus is on the rental income, preferably from good, reli-able companies on long lets.

This sector has recently been through an unusual period, with abnormally high rises in the values of the properties – so much so that the performance of these investments started attracting interest from those who normally seek out higher-risk/higher-return options – followed by dramatic falls.

However, some advisers think commercial property is beginning to follow a more typical pattern again.

Gavin Haynes, managing director of Whitechurch Securities, explains: "Over the long-term, 70% of the total return from commercial property investing comes from income, and I believe that interest in the sector from investors seeking yield and portfolio diversification will revert to normal levels."


Things start to get riskier with shares, or equities. These are units of investment in a company, which rise and fall with the demand for, and supply of, the shares.

If it's a popular company doing well, its share price will go up, and if it starts doing particularly badly and everyone is convinced the firm is doomed, share prices will fall. Within this class, again, there is a tremendous range of options.

At the relatively low-risk end are the large blue-chips, with long histories, reliable order books and a commitment to paying dividends.

These payouts, when reinvested, form the bedrock of returns, as they keep paying out even in tougher times, and can help boost total returns in flat or slightly falling markets.

Dividend-paying companies will make up the stocks in an equity income fund. They will, however, show less growth than their smaller, nimbler counterparts, which may be at the earlier stages of expansion and could double in value overnight.

After this, in terms of risk, come the broader UK funds, which invest in a mix of both small and larger UK companies.

This is followed by global growth funds, smaller companies funds and funds based in established overseas markets like Europe and the US. Next there are funds in emerging markets, like Brazil, Russia, India and China.

And finally there are niche funds, either investing in a single emerging market, such as China, or a single industry – a technology or healthcare fund, for example.

"Volatility is endemic in stockmarket investment," says Haynes. However, this is more pronounced towards the riskier end of investment, in particular in emerging markets that are largely influenced by sentiment and investor risk-tolerance.

An emerging markets fund, for example, could increase 20% in a year, but could just as easily fall by the same margin. In recent years, falls of 40% or more have not been uncommon.


You can opt for a single asset class, but you don't have to. There are plenty of investment funds that will invest in a combination of asset classes.

They range from cautious managed funds, which tend to invest in a mixture of bonds and equities, to multi-asset funds, which can take their pick and time their investments so as to weight the fund towards those asset classes most likely to do well in the fund manager's view.

Your balance of assets will depend on where your attitude to risk sits on the risk spectrum. The variety of funds on the market means it should be possible to use a range of established retail funds to buy into the assets you choose, in the proportions that exactly suit your needs.

It will mean researching the manager's record and approach, and the make-up of each fund, but there is a range of tools available online from sites like or our sister website to help you understand exactly what your funds are investing in.

Once you've chosen your assets, you will have taken a massive leap forward on your investment journey. But a first step plus a massive leap still leaves you some way to go in that 1,000 mile journey.

The next step is to pick the kind of investment vehicle that suits you. There is, of course, the high-risk option of going for a single asset – a single share, a single office block, a single bond – but this does not spread your risk and therefore leaves you very vulnerable. Haynes says this route isn't recommended for those with less than £500,000 to invest.


The usual approach, as already discussed, is through some kind of collective investment. You pay your money in, it's pooled with that of other investors, and then an expert will invest it for you across a range of holdings.

There are two major classes of these collective investments: investment trusts and unit trusts.

You can invest from as little as £20 a month into regular saving schemes from certain unit trust providers such as Invesco. But if you can afford to invest £100 a month you'll have access to a wide choice of unit and investment trust regular saving schemes.

Either of these options can be placed inside a stocks and shares individual savings account. These allow up to £10,200 to be saved tax-efficiently each tax year. Investors pay no income tax on dividend payouts, and also, when the investment's cashed in, it will be free of capital gains tax.

CGT rises to 28% from April 2011 and will apply to any gain worth over £10,100, so it's well worth protecting your investments in an ISA.

Darius McDermott, managing director of Chelsea Financial Services, recommends...

Marlborough Special Situations invests largely in UK companies, and those that for some reason are being undervalued by the market. It is a higher-risk fund than other core UK funds, but offers great potential in return.
Fidelity Special Situations has long been one of the most successful UK funds, and attracted huge sums under former manager Anthony Bolton. The running of the fund was subsequently taken on by Sanjeev Shah in January 2008, and he has impressed investors during his time at the helm.
Invesco High Income fund is the third choice on McDermott's buy list. It's managed by Neil Woodford, whose reputation is unequalled in this space.

Patrick Connolly, an adviser with AWD Chase De Vere, recommends...

M&G Global Leaders is a globally diversified fund. It invests in undervalued large companies showing signs of improvement that are not yet reflected in the share price.
Invesco Perpetual Tactical Bond fund invests in either high-yield or high-quality bonds, depending on which part of the bond market seems best value.

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