Opportunities for Cautious Investors
A cash deposit account might be the first port of call for many cautious savers. However, in an environment of low interest rates it is difficult for savers to generate a meaningful return from their deposits. The impact of inflation actually erodes the purchasing power of their capital over the longer term.
Different Risk Profiles
There is also a common misconception that investment portfolios always have to be “high risk” in nature. This is simply not the case. Indeed, one of the first things that we do for clients is assess and agree their “attitude to risk.” This helps us to place them into one of our risk profiles, ranging from “Risk Adverse” through to “Speculative.” We can then tailor the investment opportunities accordingly. You can build a further cushion into your investment by spreading money across different asset classes. Indeed, all investment portfolios should be diversified across cash, bonds, property and equities. A more cautious portfolio will simply have a lower exposure to the higher risk assets.
Risk and Reward
It is important that readers understand the relationship between investment risk and reward. Risk, if properly controlled, does not have to be seen negatively. It is also vital to emphasise that, generally speaking, the longer your money is invested for, the more risk you can afford take on board. This is because your portfolio will have the time it needs to recover should any losses be incurred.
There are plenty of ways to protect Cautious investors, here’s an example of how one of our clients has invested £200,000:
Strategy 1: Using a Capital Guarantee and Reducing Volatility
Firstly, the clients invested £100,000 into an Investment Plan with a major life assurance company. We like this particular product because of the ability to attach a ten year “capital guarantee” to the plan.
The Capital Guarantee
Following the initial investment, the company calculates the Guaranteed Fund Value. This is the investment amount less any charges incurred. At the end of the ten year guarantee period, if the value of the investment has dropped below the Guaranteed Fund Value, then the company will make up the shortfall. There is an additional charge for the guarantee, but this is well worth it for the added peace of mind that these clients are looking for.
Cautious Fund with Smoothed Volatility
The underlying investment fund aims to grow investors’ money over the medium to long term. Furthermore, the fund is also designed to protect investors from some of the short-term ups and downs of direct stockmarket investments by using a unique smoothing process. Once again, a reduced level of volatility appeals directly to our clients’ cautious nature.
Strategy 2: Discretionary Fund Management
With the above guarantee and smoothing in place for half of the monies invested and a large amount of their savings still held in cash, the clients are comfortable employing the services of a Discretionary Fund Manager (DFM) to manage a diversified portfolio with the remainder of the allocated funds.
Discretionary Fund Management ensures that the underlying assets of our clients’ portfolio are invested in accordance with their risk profile. The portfolio is managed on a regular basis and all of the investment decisions are the responsibility of the investment manager. This approach means that:
- The chosen portfolio matches the clients’ circumstances, objectives and investment profile. The portfolio is closely monitored, and changes can be applied swiftly in response to our clients’ circumstances or market conditions.
- Routine investment decisions have been completely delegated to the investment manager, allowing them to make changes to the client’s portfolio in line with an agreed mandate without having to seek consent.
- They have been provided with diversification across all of the main asset classes and market sectors resulting in overall reduced risk. The portfolio is monitored to ensure it remains closely aligned to their risk profile.
- The investment manager can switch funds quickly to take advantage of potential investment opportunities.
Conclusion
There is a lot of uncertainty in today’s financial world. Seeking the help of a financial adviser could provide you with timely oversight of your savings and investments. The above case study highlights just two strategies we currently oversee for one cautious client. There are plenty of other opportunities that we can tailor to meet your specific needs. For further help and guidance, please call 0203 6386 698 or email enquiry@lionmede.co.uk
The information in this article does not amount to personal advice. You are strongly advised to obtain specific, personal advice from an independent financial adviser about your own circumstances and not to rely on the information or comments in this article.