What kind of risk-taker are you - the low-risk investor
In the old days, before banking crises, downgrades and double dips, deciding your asset allocation was pretty easy. If you were low risk, you built a portfolio of safe-as-houses government bonds; if you were medium risk, you blended in some UK equity holdings; and if you were high risk, you focused on stockmarkets.
But the current economic climate has turned traditional assumptions about risk on their head.
Now, investors have to be clear how much risk they want to take and the amount of volatility they can tolerate. As such, the first port of call is to decide on your risk profile.
Moneywise has compiled a short, and not entirely serious, quiz to point you in the right direction:
ONE: If your investment lost 20%, how would you feel?
a) Mortified. We'd have to sell the house/car/guinea pig and change the children's schools.
b) Not that pleased, but it wouldn't significantly affect our long-term plans.
c) Sanguine - it's a chance to top-up in some exciting areas and potentially make more cash in the long run.
TWO: Do you need an income?
a) Yes, we need a consistent reliable income for day-to-day expenses.
b) Everyone likes a bit of income, but it won't leave us impoverished if we don't get it.
c) Nope, just punchy capital growth for me - I get my income from somewhere else.
THREE: How long is your time horizon?
a) Very short. We need a new kitchen/car/guinea pig next month.
b) We need a new kitchen/car/guinea pig in three to five years' time.
c) We don't need a new kitchen/car/guinea pig. We are investing for 15 to 20 years.
FOUR: What are your favoured leisure activities?
a) Gardening, listening to Radio 4 and maybe a gentle bike ride.
b) Jogging, online shopping, eating an occasional Mars Bar and glugging a glass of wine.
c) Bungee-jumping, driving fast cars and vodka shots
FIVE: Are you worried about your job?
a) Yes, as a Greek public sector worker, I am feeling the pinch a little.
b) My company isn't doing brilliantly, but I feel OK for now.
c) I'm a tax inspector, so I'm feeling pretty secure.
SIX: Do you have dependants?
a) Where do I start? There's my spouse, four children, the guinea pig, the elderly parents and next-door's cat...
b) Just the usual, partner and couple of kids.
c) No, there's just little, old me.
In case you hadn't guessed, if you scored mostly As you are low risk; mostly Bs makes you medium risk, while mostly Cs makes you high risk.
That's the easy part. The difficult bit is trying to decide where that leaves you in terms of your overall asset allocation.
It is perhaps the lower-risk investors for whom things have changed the most. Usually, they would be invested in a blend of lower-risk government and corporate bonds, maybe a commercial property fund, plus some cash and perhaps a small allocation to blue-chip equities. The trouble is that government bonds no longer look low risk.
Marcus Brookes, head of multi-manager at Cazenove Capital, says: "The price of gilts suggests we're going into a deflationary bust. If that doesn't happen, there's potential to lose a lot of money in gilts. If investors are whipsawed by a policy decision, they could lose 20% in a week."
Mark Dampier, head of research at broker Hargreaves Lansdown, agrees: "Government bonds have traditionally been seen as risk-free, but they are only risk-free if you believe in a Japan-style deflationary decade ahead, and I don't think that's coming. If UK bonds went to where Italian bonds are - and the debt differential is not so great - they could lose a lot of value very quickly."
So what should low-risk investors do instead? Darius McDermott, managing director of Chelsea Financial Services, says that if investors really can't bear the volatility in markets, they will simply have to go to cash. He adds: "Up until 2008, bonds would have been my first port of call, but many corporate bond managers have big chunks in bank bonds."
Dampier also recommends a reasonable weighting in cash, not least so that investors can take advantage of investment opportunities as the economic mist clears.
Possible investments: M&G Optimal Income, Jupiter Absolute Return, Majedie Tortoise Cash
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.