Managed Fund Surveys: Not just a case of extremes

Investing in the stock market isn't about either risk-taking or playing safe - it's about a balancing act of the two. By Nic Cicutti

Whenever the subject of investment is broached, a typical assumption is that investors will either be looking for a relatively risk-free investment or that it must involve highly speculative mixture of shares.

In fact, nothing could be further from the truth. As Fiona Price and Christine Ross, the two financial advisers on this page, suggest, investment can involve a combination of different options including both low- and high-risk funds.

It is this combination which allows investors to feel reassured that they will not lose out heavily (if at all) should markets should go down the plughole - but with the potential for decent returns if things go well.

How does one combine the two? The starting point is to work out exactly what level of jeopardy to funds you are prepared to accept. At one end of the spectrum are bank or building society accounts - measuring one on our risk scale.

At the other end, an eight on the same scale, are emerging market funds, or even, at 10, the capital shares of a split-capital investment trust. Somewhere in the middle are with-profits endowment funds of one sort or another.

Constructing a sensible, low-risk portfolio starts with setting aside a proportion of funds in some easy access account, say with a building society. This should be up to 25 per cent of your money, or two to three months' spending money.

Then, up to 50 per cent could go into with-profits bonds, a relatively safe investment which holds a variety of assets, ranging from equities to property, fixed interest funds and even cash. This money will deliver safe, if not incredible returns. What is more, once an annual bonus is added, it can rarely be taken away.

That leaves 25 per cent or more money. With this, you can afford to take a few risks. For instance, you might want to pick out a few UK or European unit or investment trusts, or set up an index-tracking PEP (either in the top 100 UK shares or in the FTSE All Share).

This part of the portfolio is what will add spice to the safer investment mix of with-profits bonds and cash. If you were prepared to try out something even hotter, it might make sense to take 5 or even 10 per cent of your total funds and look to something which offers the potential for more aggressive growth.

Among the areas worth considering are the technology sector, where the ideas, industries, drugs and mechanical processes of tomorrow are being developed today.

Alternatively, for contrarians, there are Pacific Rim economies, including Japan, bombed out at present but (claim some experts) due for a revival in the next few years. Or you might feel that the Russian economy has sunk so low that there are buying opportunities even there.

In each of these cases, the money you are investing is money you should be prepared to lose. That may happen, but if it does, the vast bulk has been stashed away in a much safer place.

The key word here is balance. By constructing a portfolio in this manner, including cash, low-risk with-profits bonds and pooled equity funds, you have raised your overall risk profile from a four to a five, six, maybe even a seven on the scale discussed earlier. At the same time, the vast bulk of your funds are still relatively secure.

In today's uncertain investment climate, that is not necessarily a bad thing at all.

To explain with-profits bonds, one of the "asset classes" described in this article, `The Independent' has produced a free, 24-page Guide to With-Profits Bonds. Written by Nic Cicutti, this paper's personal finance editor, the guide examines the arguments for and against investing in bonds. It discusses the tax implications and where to buy a bond. For your copy of the guide, sponsored by The With-Profits Bond Shop, call 0845 2711007