Are you new to the world of investing or especially risk averse? We look at which products might be best suited to lower-risk investors – and the golden rules to follow.
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What is lower-risk investing?
Before we say anything else let's make one thing absolutely clear: there’s no such thing as a completely safe investment. There will always be a degree of risk involved when you’re trying to make money.
But there are ways to minimise the danger by choosing lower-risk products that can generate a decent return – and enable you to sleep at night.
It’s an approach that will sound appealing if you can’t afford to lose money or aren’t comfortable enduring the daily stock market volatility.
However, a lower-risk strategy also has potential downsides.
The price you pay for embracing less risk is a lower return, so it all depends on how much money you need to make.
Risk is an inherent part of investing, but it’s a tough balance, according to Myron Jobson, senior personal finance analyst at Interactive Investor.
“Take too much risk and you might learn some painful investing lessons – but taking too little can have a hugely detrimental effect on your future finances as you might not reach your goals,” he said.
Investment options, fees to expect & more
As you'll know, the safest way of making a return is through cash – in either a basic savings account or a tax-free ISA.
The main risk is making sure interest on offer is higher than the rate of inflation.
Currently, this is possible because inflation is running at 2% and the top accounts are paying around 5%.
So if that's all you care about then you can rest safe in the knowledge you can beat inflation without taking on any risk – for the short-term at least.
But what options are available to you if you're willing to take on some risk?
Bonds
The first step up the risk/return ladder after cash is bonds.
This is where you generate a return by loaning money to either a Government or a business.
You will receive a fixed rate of interest for a pre-agreed period, as well as the face value of the investment returned on a specified future date.
The safest are those issued by stable Governments – in the UK they are known as Gilts – and they can be bought via a stockbroker or the UK Debt Management Office.
However, bonds aren’t completely risk-free.
Prices fluctuate in response to interest rate and inflation expectations, as well as the possibility of issuers defaulting on payments, warned Jason Hollands, managing director at Bestinvest.
“You can either invest directly in individual bonds, which will involve paying a dealing fee – typically between £5 and £12 for an online platform – and then any account fees charged by your broker or platform,” he explained.
“However, the most common route is via bond funds.”
Such portfolios focus on either Government or corporate bonds or a combination of them both. Costs and returns will vary.
Those with low-risk tolerances who want to outpace inflation and cash over the long term should consider multi-asset investing, according to Darius McDermott, managing director of FundCalibre.
“Low-risk multi-asset investing offers diversification benefits that help reduce overall risk and provide more stable returns,” he said.
“Spreading investments across various asset classes, such as stocks, bonds, and property, can achieve steady income and preserve capital.”
Possible returns
The all-important question is: how much money can you earn by taking a lower risk?
Unfortunately, it's not an easy one to answer as returns will depend on several factors, including interest rates and how well an asset performs.
Jason Hollands pointed out that five-year gilts are yielding 4.05%.
"This means if you bought a five-year gilt and held it until maturity, that is the effective annualised rate of return you will receive comprising both income and the expected capital gains when they are redeemed," he said.
"You can get circa 5% interest in the most competitive savings accounts at the moment but those rates are variable and expected to come down over the next few years. They aren't locked in like the yield on a gilt."
Hollands also pointed out that many lower-risk strategies, including absolute return funds, target a return over and above either cash savings or inflation.
"These can depend on the fund," he said. "For example, the TM Fulcrum Diversified Absolute Return fund aims to achieve positive returns of 3-5% above inflation on a rolling five-year basis, but this is a target and not guaranteed."
How to get involved: practical examples
A low-cost route to owning Government bonds is via an Exchange Traded Fund (EFT), according to Jason Hollands of Bestinvest.
An ETF is a basket of securities, such as stocks and bonds, that are bought and sold on stock markets via a brokerage.
“One of our preferred funds is the iShares Core UK Gilts UCITS ETF, which has tiny annual costs of 0.07%,” he said.
“This is much lower than an actively managed gilt fund, which would typically charge 0.35% pa.”
FundCalibre’s Darius McDermott suggested three multi-asset funds that could be worth considering by lower-risk investors. While the expected performance may vary, he suggested an annualised return of 5-6% could be possible.
The first is Ninety One Diversified Income. “This fund is an ideal building block for a risk-averse investor looking to move their cash into an investment fund and derive a steady income,” he said.
He also likes the Schroder Global Multi-Asset Cautious Portfolio.
“The fund aims to provide capital growth and income by investing in a diversified range of assets and markets worldwide,” he said.
Finally, McDermott highlighted the WS Ruffer Diversified Return fund.
“The fund aims not to lose money on any 12-month rolling basis, with a strong emphasis on providing genuine protection in times of market stress,” he explained. “Asset allocation is the key driver of returns in the portfolio.”
Meanwhile, Ben Yearsley believes an investment trust such as Personal Assets is a good choice for anyone who accepts that some risk needs to be taken to achieve a higher return than cash.
“It invests in quality companies, gold, and inflation-linked government bonds,” he said. “It varies the weights depending on the manager’s view of the economic outlook and aims to protect your capital from the ravages of inflation, as a minimum, over time.”
* None of the above constitutes financial advice. Consider taking financial advice before making investment decisions and accept that you should never invest money that you can't afford to lose.