Are you wanting a decent return from your investments but dislike too much volatility? We look at which products might be best suited to medium-risk investors - and what you need to know.
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What is medium-risk investing?
We have already looked at low-risk options for those just starting their investment journies – but where should you put your money if you want a higher return?
Here we look at the options for medium-risk investors who need inflation-busting returns but are reluctant to throw caution to the wind.
Firstly, the definition of a medium-risk investor is pretty subjective.
Everyone has their own idea of what this means.
Some will class it as investing in blue-chip company shares with strong balance sheets in developed markets, according to Jason Hollands, managing director of Bestinvest.
“For others, it will mean taking a balanced approach that blends equities, bonds and other types of assets, such as infrastructure, property and gold,” he explained.
However, the most widely used definition focuses on volatility, which is the extent to which the price of an investment might fluctuate and the potential for permanent capital loss.
“The latter is elevated when investing in tiny, start-up companies that could go bust or other highly speculative investments,” added Hollands.
Victoria Hasler, head of fund research at Hargreaves Lansdown, classes medium-risk investors as those who want their portfolio to grow but are reluctant to experience too much volatility.
“We would broadly define this approach as ‘balanced’, with a starting point for a long-term strategic asset allocation of 60% in equities and 40% in bonds,” she said.
The actual amounts in each will depend on the economic conditions. “At the moment, a client like this would have about 45% invested in fixed income and 55% in equities,” she added.
Of course, the all-important question is: how much can investors make from such an approach?
While returns will vary, medium-risk investments have generally provided returns of between 5% and 8% per year, according to Darius McDermott at FundCalibre.
“This can vary based on the economic environment, prevailing interest rate and market performance,” he said. “Investors should keep costs below 1% of any fund or holding.”
Investment options, possible returns & more
Now we know what medium risk investing means and the likely returns, what type of products are best suited to this approach and are there any golden rules to follow?
According to Ben Yearsley, director of Fairview Investing, it’s less about which asset classes are suitable and more about the proportion of each that is held.
“Equities, bonds, and property are all suitable for medium-risk investors,” he explained.
“You’d just have less invested in the riskier, more volatile ones, such as equities.”
Yearsley believes equity Income funds can play an important role in a medium-risk investor’s portfolio as they invest in companies that make profits, generate cash and pay dividends.
“A good equity income fund will give you some capital growth over time and increase your annual income or dividend payout,” he explained. “I’d look at JO Hambro UK Equity Income.”
Equities have an important part to play as they’re most likely to deliver the best long-term returns, but they need to be tempered by less erratic investments, according to Bestinvest’s Hollands.
He suggested adding in government bonds and corporate bonds issued by financially robust companies, as well as a little exposure to assets like gold and infrastructure.
“Blending these can smooth out some of the overall volatility,” he explained.
It’s also advisable to further divide the equity portion of an investor’s portfolio, according to Victoria Hasler at Hargreaves Lansdown.
“At the moment, we’d point investors to having about 36% in global ex-UK equities, with the remainder split between UK equities and emerging markets equities,” she explained.
One option is to create your own blended portfolio by purchasing a basket of equity and bond funds, according to Jason Hollands at Bestinvest.
However, you’d need to periodically rebalance the mix between the two as the risk profile will drift over time, especially if equities have a strong run and end up with a bigger share of the portfolio.
“Rebalancing means locking in some of those gains, trimming back the holding and topping up in other areas,” he explained.
How to get involved: practical examples
Realistically, a multi-asset style investment fund is a wise approach for medium-risk investors as they will have a fund manager making such calls on their behalf.
Many investment houses offer such funds that are suitable for medium-risk investors. However, you’ll need to discuss with your adviser which ones are best suited to your objectives.
According to FundCalibre’s Darius McDermott multi-asset funds invest in a wide range of assets including equities, fixed income, property, infrastructure and commodities.
“Harnessing all the diversification benefits of different asset classes can produce consistent returns through economic cycles,” he explained.
FundCalibre’s Darius McDermott believes a balanced risk fund with a medium-term time horizon is a good choice for this type of investor.
He recommends Jupiter Merlin Income. This is a multi-manager fund, which means it invests in other funds, as opposed to individual shares.
“Its investment mandate allows for a considerable allocation towards bonds and cash, which will lower its risk profile,” explained McDermott.
“As it is a multi-manager fund, there are a large number of underlying holdings to help diversify risk.”
He also believes the Lazard Global Equity Franchise is suitable for medium-risk investors.
“The fund looks very different from its peers, with no style bias and a concentrated portfolio,” he explained.
“It seeks out solid industry leaders with natural monopolies, cost leadership, strong brands, intellectual property or high barriers to competition.”
Hargreaves Lansdown’s Victoria Hasler highlighted the Schroder Managed Balanced fund as a good option for those with smaller portfolios.
“This is a diversified portfolio, managed by an experienced team who take care of the asset allocation decisions for you,” she said. “It invests mainly in other Schroders funds, tapping into the expertise of several specialist managers.”
Of course, there is no shortage of multi-asset funds that can provide a one-stop shop portfolio that is balanced in nature.
Jason Hollands at Bestinvest suggested the Personal Assets Trust plc, which sits at the more defensive end of the spectrum.
“This investment trust has a strong emphasis on capital preservation and invests across a combination of blue-chip equities, inflation-protected bonds, government bonds and gold,” he said.
The weightings will move around depending on the outlook, so it can range between very cautious and moderate risk. “Currently it is very cautiously positioned with equity exposure pared back to just 28%,” he added. “This is one of the lowest levels in its history.”
* 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.