What risk will you take for higher returns?
If you’re the kind of person to make New Year’s resolutions, then make a pledge to ensure your money is invested in the right place for you.
Take our quiz to find out if your financial portfolio is positioned to meet your needs, and whether you’re really happy with the level of risk you’re taking.
1. Have you just started the daily office grind or are you about to hang up your boots?
I’m almost or already retired.
B. I’ve got at least 10 years to go before retirement.
C. It’ll be more than 25 years before I give up the day job.
2. Do you need to be able to get your hands on your cash?
I might need it at a moment’s notice.
B. Perhaps in five years’ time or more.
C. Certainly not for the next 10 years.
3. How much have you already stashed away in savings for a rainy day?
None or very little.
B. Around six months’ salary.
C. Far more than I need.
4. What are your expectations of your investments?
Slow, steady and safe.
B. Better returns than my bank but I don’t want to lose my shirt.
C. As much growth as possible, even if it means taking a big hit once in a while.
5. How much time are you willing to spend researching and reviewing your investment?
I look at it once in a blue moon.
B. I’m willing to review it once a year.
C. Investing is my hobby, so I’ll do it as often as I can.
6. You’re at the casino and you’ve just won £10,000. What would you do with your winnings?
B. Gamble 50% and keep the rest.
C. Gamble it all for an even bigger win.
7. You’ve been given a tip that a particular company is going to do really well, but it could be a gamble. Would you invest?
No way – it sounds far too risky.
B. I’ll do my own research before taking the plunge.
C. Absolutely – I don’t want to miss the boat.
HOW DID YOU SCORE?
Look at your answers to find out which style of investment approach is suitable for you. Then read on to see where you need to invest.
|If you scored mostly:|
|As||You need to stick to lower-risk investments|
|Bs||You can mix it up with a diversified portfolio|
|Cs||You’re happy to opt for the risky options in the hope of big returns|
Putting your money where your mouth is
Once you’ve decided which type of investor you are, check the range of recommendations in our guides to see how to structure your portfolio to meet your goals:
Investor A – low risk
If you answered mostly As, you should approach investing with caution. This may be because you’re approaching retirement or can’t afford to lose money, or you simply hate taking risks and would find it hard to sleep at night not knowing if your money is safe. This means sticking to cash and bonds rather than opting for the rollercoaster ride of the stockmarket.
If you’re saving an ‘emergency fund’ for a rainy day, or for something specific like buying a property, then this approach also makes sense.
However, if you have more than 10 years to go before retirement, and have a pot of cash in place, then such cautious investments are unlikely to reward you with particularly appealing returns. If this is the case, you are likely to sit further up the risk scale as a medium-risk investor.
If you really can’t afford to take any risk, you should, ideally, work on building up an emergency cash fund of up to six months’ salary as a starting block for your portfolio. Although savings rates remain fairly paltry, there are a few decent ones around - see Moneywise's daily savings round-up for the latest rates.
If you’ve not used your individual savings account allowance, remember your first £3,600 of cash savings each year should always be held in a cash ISA, as all growth is tax-free. This limit rises to £5,100 from this April – but if you’re over 50 you can already take advantage of the new allowance.
Corporate bonds, which are basically IOUs issued by a company, are riskier than cash accounts but remain suitable for low-risk investors. They are particularly popular with retired investors as they provide a stream of income alongside capital growth, away from the volatility of the stockmarket.
If you’re extremely cautious, investing in government bonds, so-called gilts, is even safer. These are backed by the government, so unless it falls apart you can’t lose out.
The best way to access bonds is through funds investing in them. Gavin Haynes, managing director of IFA Whitechurch Securities, recommends the M&G Strategic Corporate Bond, currently yielding 4%. If you fall into this risk category, you might want to avoid the highest-yielding funds. These will buy from companies that are more likely to default on loans and are therefore higher risk.
Investor B – medium risk
If you answered mostly Bs, you are able to take more risk with your investments – and perhaps even throw some caution to the wind by mixing some higher-risk funds into your portfolio, depending on how comfortable you feel with this. You may, for example, have some way to go before retirement, already have a ‘rainy day’ fund, and be willing to take on a bit of a risk to increase possible returns.
In this scenario, you’ll need a mixed basket of investments, including cash, bonds, property and equities. Diversifying your portfolio in this way will help reduce risk, as different funds and investments invested in different countries and different types of companies will all behave differently.
Unless you can afford to lose money, combine these higher-risk investments with those recommended in category A to safeguard some of your money from the vagaries of the stockmarket. Remember, any stocks and shares come with a degree of volatility, so you need to keep focused on your long-term horizon to avoid panic setting in when the bumps occur.
Ideally, pick a range of cash accounts, bonds, and funds that offer a mixture of income and growth – with the portion in each matching the amount of risk you’re comfortable taking on and how much you have to invest. You could go down the fund supermarket route, such as Fidelity FundsNetwork or Interactive Investor, if you’re happy choosing your own investments, or seek guidance from an independent financial adviser.
Some of the lower-risk equity funds include cautious managed funds, for example, that can invest no more than 60% of their assets in stocks, with the rest invested in cash or bonds. Ben Yearsley, investment manager at IFA Hargreaves Lansdown, recommends Invesco Perpetual Distribution fund.
Alternatively, the UK equity income sector offers a combination of income and growth and is one of the most popular investment sectors in the UK. Haynes recommends Artemis Income (managed by Adrian Frost, who has an excellent long-term record at tailoring investments to changing economic circumstances), as well as the Schroder Income Maximiser.
Investor C – high risk
If you answered mostly Cs, then you are fairly happy to take a risk in order to seek the highest returns possible. You are likely to be confident about your own investing skills and have some time on your hands. However, you should only consider ploughing your money solely into high-risk investments if you have a lot of money to invest and are in a position where you can comfortably absorb heavy losses.
If this is the case, you can turn solely to equity investments, and the riskier funds and markets out there. You will need to be able to stomach potentially losing a hefty slice of your money, but it could prove a particularly satisfying route to high returns if you strike lucky – and as green shoots continue to emerge in the economy, there should be many opportunities to be had among those sectors that suffered during the crisis.
The funds that investors tend to pick in this arena invest outside the UK, focusing on emerging markets, in particular the BRIC economies – which consist of Brazil, Russia, India and China. An example of a good fund in the sector is the Allianz Global Investors RCM BRIC Stars fund. Yearsley also recommends First State Global Emerging Market Leaders.
If you want to invest on a more global basis, there are funds that focus on Europe, the US, Japan and the Far East. Although these carry the risks you might expect with the high returns they offer, the diversity of countries in which they invest means they are less volatile than emerging markets or many single-country funds. Neptune Global Equity, managed by Robin Geffen, is “traditionally good at calling global themes”, says Haynes.
There is also the specialist sector, including commodities funds such as JPM Natural Resources, which could continue to benefit from the demand from China and India, for example, as these countries concentrate on improving their infrastructure.
You could even try your hand at being your own fund manager and pick the stocks yourself in the hope of landing a small fortune.
How often should I review my portfolio?
We usually make sure to visit the dentist every year and give the house a spring clean, so why not add taking a long, hard look at your investment portfolio to your annual to-do list?
Setting aside a few hours every six or 12 months can make all the difference to your portfolio performance. Check how your investments are doing, whether charges are taking too big a slice from your money, and that they suit your risk profile.
This is particularly important if you’ve opted for higher-risk investments, and in this case you might want to review things more regularly. Similarly, if you’re approaching retirement, it’s increasingly important to keep an eye on your portfolio. You might need to consolidate your gains and shift to more cautious investments.
What you want from your investments can change over time, depending on the stage in life you’ve reached and your circumstances. Age should also influence your attitude to risk in some respects, as younger investors have time to ride out short-term volatility, while those who are about to retire don’t.
Similarly, if you’re saving for a specific purchase such as a property, this will dictate your investment approach. Consider all the factors carefully – and seek independent financial advice if necessary.
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.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
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).
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.
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.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
An acronym, which stands for Brazil, Russia, India and China; countries all deemed to be at a similar stage of advanced economic development. The term was coined in 2001 in a report written by Goldman Sachs director Jim O’Neill who speculated that, by 2050, these four economies would be wealthier than most of the current major G7 economic powers.