Get the balance of your ISA right for you

Share this

The vast majority of investors will describe themselves as 'cautious' or 'medium risk'. After all, no one particularly likes losing money and most of us are realistic enough not to take wild risks with our savings.

Equally, the credit crunch has exposed investment risks where none were seen previously. That said, risk means very different things to different people. For some low risk will mean complete capital preservation, for others it means a steady income, yet for others it means long-term, predictable, capital returns.

So how can investors determine where they truly sit on the risk spectrum and build a portfolio accordingly?

Looking for an introduction to ISAs?

Patrick Connolly, spokesperson for independent financial advisers AWD Chase de Vere, says that it is important to look at risk on an individual basis and to understand what people are trying to achieve and over how long: "Investors need to recognise how much money they are prepared to lose, as this will feed in to deciding the most appropriate investment approach for them."

Neil Shillito, a director at SG Wealth Management, agrees that an understanding of the potential for capital loss is vital: "Investors need to be aware that there is no free lunch. You cannot get a high return with capital preservation."

Cash buffer

Cash is the first port of call for the cautious investor. This is appropriate if you truly cannot tolerate a capital loss and/or any volatility, either because it would cause you significant anxiety to see your savings fall or because the capital is required for a tangible cash outlay, such as school fees.

But Shillito says that investors should keep cash balances to a minimum where possible. "Many investors are very scared of moving away from cash. For my clients, I look at their immediate cash requirements – £1,000 to go on a holiday, or £3,000 to buy a new car, for example.

"Beyond that, it is foolish to keep cash in the banks and building societies."

Jason Witcombe, financial planner at Evolve Financial planning, offers another option: "If you are really cautious, just invest less. It may seem obvious, but too many people look at investments in isolation rather than looking at their overall portfolio. Ultimately you need to be comfortable with the risk you are taking in the context of your overall portfolio."


The next step on the risk scale is government bonds (gilts), also a traditional stomping ground for cautious investors.

But as happened with cash, the crisis and the resulting low interest rates have turned investment expectations on their head. Gilts are now at historically low yields and a significant reversal – with ensuing capital loss – is a possibility.

Alex Morris, partner at IFA firm Financial Relationships, points out corporate bonds may have seen better rates of overall growth than cash and government bonds, but with a level of volatility that would unnerve lower risk investors. For the majority of investors, however, the degree to which they are 'cautious' will be the degree to which they are unwilling to accept volatility.

Protection against volatility

A number of things can mitigate volatility. Investing in a diversified range of assets is particularly important, as it should mean that one part of a portfolio supports another part if an asset class does particularly badly. It should therefore help smooth out the return to investors.

Also, individual assets may have more or less volatility. Shares tend to be more volatile than bonds. Emerging market or smaller companies shares will tend to be more volatile than blue chip shares.

Many people will also be able to mitigate volatility by investing regularly. By drip-feeding money into the market, the buy prices of investments average out. Some payments will go in at higher prices and some at lower prices. Your average cost may be lower and you don't have to worry about getting the timing exactly right. This is called pound-cost averaging.

Connolly says: "For nearly all investors, the best approach is to have a blend of investments including cash, shares, fixed interest and commercial property. For more cautious investors there should be a focus on more secure assets such as cash and fixed interest and less focus on more volatile assets such as shares."

You need to ensure that your own definition of risk chimes with those of the fund managers in which you invest. In this, you will have to be willing to look under the bonnet of their investments to ensure there are no surprises. The low interest-rate environment has changed the outlook for many investments and you need to expect the unexpected.

Fund recommendations

Neil Shillito, SG Wealth Management

Gartmore Cautious Managed

Investec Cautious Managed

Invesco Perpetual Distribution

"A blended equity and fixed income fund is usually most suitable for those dipping a toe in the water. Absolute return funds and cautious managed funds can also be appropriate. Gartmore, Investec and Invesco all have strong cautious managed funds.

"For most investors, there will be occasional down periods, but over a five-year view, they will see a gain."

Alex Morris, Financial Relationships

Cazenove Multi-manager Diversity

Close Asset Management Discretionary fund range – Bond, Conservative, Cautious portfolios

"My preference has been for cautious funds that have low volatility with long-term growth prospects. The Cazenove Multi Manager Diversity fund achieves this whilst limiting the equity content to one third of the overall fund. Clear parameters are set for limiting downside and catching upside.

"Close Asset Management has been another group to weather the Lehman crisis with aplomb in the lower risk categories. The group has recently launched three discretionary portfolios with low total expense ratios that would suit low-risk investors."

Patrick Connolly, AWD Chase de Vere

Fidelity Multi Asset Strategic

"This is a 'sleep at night' fund that invests in a range of Fidelity's other funds covering shares, fixed interest, property, commodities and cash. Its typical position is 50% in growth investments and 50% in safer ones."

JPMorgan Cautious Total Return

"This fund aims to preserve capital and provide steady returns by investing in shares, bonds, gilts and cash. The management team have the flexibility to change weightings in these assets depending on where they think the best opportunities are."