Risk-free investments?

gataylor

Hi there,

I have a low-cost online SIPP with Selftrade, and I'd like to be able to devote a portion of my funds to a risk-free investment.

Basically, while I'm happy to invest some of my money in shares/funds/etc., I'd like to keep a portion of the capital away from those risky ventures so that even if everything goes pear-shaped there'll be a small pot.

So, as part of that I'm trying to find the best investment I can that guarantees the capital while still providing some interest.

That's surprisingly tricky. So far I've discarded:

• 'Guaranteed' funds. I couldn't find one that guaranteed 100% of the capital (the US MITTS funds do, but then you get exposure to currency risk). 90% or 80% guarantees were common enough though. Also, funds seem to me to be a very costly way of doing it. (If someone does know of a decent 100%-capital-guaranteed fund, I'd love to hear of it.)
• Gilts. As I understand it, bond prices move, and as interest rates go up bond prices go down. That's not stable enough for my purposes here. (Even index-linked gilts prices move.)
• 'Absolute Return' funds. I actually did look at some of these, and I was thoroughly unimpressed.

Selftrade pay 3% interest on cash (as long as you have more than £15,000) - and that figure applies to the whole amount, not the portion above the threshold. That seems pretty good, and keeping it as cash is a good enough guarantee for me.

However, 3% is not very much over inflation and I'm hoping there's a way to do better without risking the capital.

Any thoughts or ideas?

Geoff

ReportInvestor

There's no such thing as a "risk free investment" - even cash.

Diversification is one key to lower risk, e.g. commercial property (warning - it has done well and may be peaking) doesn't perform along the shares cycle.

Gilts and bonds could get hit badly by inflation, and to a lesser extent cash, but if you have some equities then hopefully profits/dividends/share prices might continue to rise - as would residential property.

Don't keep all your eggs in one basket and you will usually have something to smile about .

I agree with you about absolute return hedge funds. There was a brilliant article in the Sunday Times slagging them off this week. It's another excuse and marketing device whereby the financial services industry can levy high charges.

On MSE we ALL hate guaranteed stock market funds (it's the only thing everyone can agree on ). It's the reinvested dividends that will make you money in the long term and the Guaranteed Equity Bonds manage to pocket these :rolleyes:.

My own personal hint at reducing risk is to take on the stock market but do so via regular savings. If the market falls but later recovers, you can do very well.

You can do that perfectly well via your SIPP.

gataylor

ReportInvestor wrote:

There's no such thing as a "risk free investment" - even cash.

True, true, and even if cash were safe there are other potential risks to keeping the cash in Selftrade. So maybe risk-free was a poor choice of words on my part. I'm not sure how to phrase it better though - I acknowledge that there are such risks, but I'm not sure how to phrase my question without opening it up so much that "Honest Bob's 110% Guaranteed Guv'nor Fund For Patsies" is included too. I hope you see what I mean.

ReportInvestor wrote:

Diversification is one key to lower risk, e.g. commercial property (warning - it has done well and may be peaking) doesn't perform along the shares cycle.

Oh, absolutely. I already have some of my SIPP sprinkled about in some low-risk to moderate-risk things, as well as a tiny portion going to some more adventurous investments. But I'd also like to dedicate a portion to stability, a 'rock solid' investment that I can count on not to degrade my capital even in very bad situations, and that may make some extra money too.

Geoff

ReportInvestor

Diversifying. Glad to hear it. That's the way

gataylor wrote:

I'd also like to dedicate a portion to stability, a 'rock solid' investment that I can count on not to degrade my capital even in very bad situations, and that may make some extra money too.

Geoff I don't mean to be rude, but sometimes you have to be cruel to be kind.

You're starting to sound like those mad Spanish Conquistadores after 12 months in the jungle and no sign of El Dorado .

I've forgotten the film title but I think it was by that German director. ?Fassbinder?

dunstonh

But I'd also like to dedicate a portion to stability, a 'rock solid' investment that I can count on not to degrade my capital even in very bad situations,

They exist but the flip side is that they do little or nothing in the way of real growth. If you periodically rebalance your portfolio (as any decent portfolio should be) then utilising gilts, corporate bonds and commercial property is a good idea. If you want to rely on them heavily over the long term as a invest and forget option, then that makes them less desirable.

The minute you ask for guarantees, you start taking a hit with expenses as guarantees cost. A balanced portfolio appropriate to your risk profile should include some low risk sectors and if you are cautious in nature (as it is beginning to sound) then the percentages allocated to those areas should see you fine.

Debt_Free_Chick

When you say "risk-free", which particular risk are you looking to avoid? And have you considered that being free one type of risk usually means that you have accept a different type of risk?

gataylor

Debt_Free_Chick wrote:

When you say "risk-free", which particular risk are you looking to avoid? And have you considered that being free one type of risk usually means that you have accept a different type of risk?

Hi,

I think the best way to interpret what I meant by 'risk-free' is the sense it's used to describe LIBOR (or sometimes the base rate) as the 'risk free rate of return'. Or as the LSE says "The rate earned on riskless investment, denoted rf. A reasonable proxy is short-term lending to reputable government."

It's not truly risk free, but in that parlance I think it means 'the rate of return I can get from having the cash invested at the Bank of England's standard lending rate withough having to get off my seat and look hard at investments'. Sortof.

So, with interest rates at 4.75% I'd expect there to be some way of earning a 4.75% return on money by having it on deposit with a bank. (Erm, yes, that's a gross simplification. Gloss over that.)

And indeed there are such possibilities, including the recent Icesave from Landsbankski (great name for a bank, eh!) - 5.2% and guaranteed to be 0.25% over base rate until 200.

Unfortunately, it's not possible to use this from within my low-cost online SIPP. That's what led to my question, which could maybe be better phrased as - are there similar 'risk free' products that are available for use wihin a low-cost online SIPP?

margaretclare

Hi

I'm no expert but...risk-free and rock-solid? IMHO there ain't no such animal.

Some investments are considered lower risk than other - usually gilts, which is Government money (I think). But nothing is free of risk in this world. You just have to decide on your level of risk, and usually, us wrinklies are considered to want a very low risk to provide a 'secure' income to live on. However, even those are not free of all risk.

Within your low-cost SIPP, you could try looking at Aegon Corporate Bond, either accumulation or income units. But this isn't advice, remember! Advice is what you pay for.

Margaret

TBeckett100

Im an IFA and I would point you in the direction of the KeyData Secure Income Plan Fixed Income (or growth option) with no stock market exposure. This isnt risk free but may be better than the rest,

ignore the banks offering of 112% in the FTSE because they use averaging techniques and a fag packet calculation for one client showed a £400 return on £100,000 over 5 years

please note this message should not be construed as financial advice. If in doubt, speak to an independant adviser.

cheerfulcat

gataylor wrote:

• Gilts. As I understand it, bond prices move, and as interest rates go up bond prices go down. That's not stable enough for my purposes here. (Even index-linked gilts prices move.)

You can ignore price fluctuations if the gilts are bought at or near par and held to maturity.

Paul_Herring

TBeckett100 wrote:

I ignore the banks offering of 112% in the FTSE because they use averaging techniques[...]

Typically these beasts guarantee the 112%(or whatever figure) by keeping hold of any dividends the shares produce - people /may/ be better off just getting an accumulation tracker where the dividends are re-invested.

[...]a fag packet calculation for one client showed a £400 return on £100,000 over 5 years

Can you reproduce the working? A 12% 'guaranteed' increase on 100K whould result in 112K in year 5 surely? (Ignoring inflation of course.)