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Friday 16th January 2009
The answer to that question is usually “I’ve no idea”. Typically, investors with pension plans or investment products choose to go with the default funds and have no idea what their fund is actually invested in.
What are default funds ?
Default funds are usually types of managed funds, or even With Profits funds, where your money is deemed to be in one of the safer places. But as they can be exposed to lower risk investments they might not perform as you hope. Or it could be that you are being exposed to too much investment risk, as you would be if you plan to access your funds in the near future for example. And this is usually one of the main reasons that can cause dissatisfaction with how your collection of investments (portfolio) is performing.
The risk from 1-10
Imagine that investment risk can be expressed on a scale of 1 to 10, with 1 being a safe bank account and 10 being invested in pure-equity, high-risk investments.
The average ‘With Profits’ fund can range from quite low down the scale up to perhaps 5 out of 10 depending on what company you use. The average managed fund is probably more round a 5 or 6 on the scale of 1-10. Again, it depends on which company your investments are with. The funds that place your money at a higher risk can include geographical equity funds such as North American funds or, for example, Venture Capital Trusts (VCTs). We then get onto different types of assets outwith equities such as fixed interest, commercial property and commodities such as precious metals like gold etc.
The whole point of having access to these different types of funds is that they are invested in different asset classes and can therefore be used to offset each other’s investment risk within your portfolio. This avoids the problem of investing all your assets in the one investment basket.
Ideally, your IFA will recommend funds that you’re happy with and that compliment your attitude to investment risk and not recommend something you’d be anxious about. This may mean then that you include more or less equities than your friend or colleague who has a similar sized portfolio. Quite simply, they might be happy taking more risks than you.
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