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‘Low Risk Funds’- What exactly does it mean?

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‘Low Risk Funds’- What exactly does it mean?

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Everybody talks about the imminent or inevitable crash, we are relatively newly retired, I have a decent DB pension( enough to cover essentials) OH has a SIPP in ‘cautious funds’-40%equities, 40% bonds and 20% cash.( 300 000 in total) We also have 3 years in savings in the bank .
OH is 4 years from SP and I am 9 years

Just wondering what does having cautious funds mean? Obviously they don’t grow as much as ‘aggressive’ funds but does it actually protect you that much if a 2008 event would come along?
And how long into retirement until you stop worrying about your money all of the time!
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  • eskbankereskbanker Forumite
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    Just wondering what does having cautious funds mean? Obviously they don’t grow as much as ‘aggressive’ funds but does it actually protect you that much if a 2008 event would come along?
    The principle is obviously that lower growth during good years is balanced by lower drops in bad years - if the funds concerned were available before the 2008 event then you should be able to see what happened then on historical charts, etc.
  • edited 16 February at 8:37PM
    ThrugelmirThrugelmir Forumite
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    edited 16 February at 8:37PM
    "Aggressive funds" aren't guaranteed to outperform over a particular time frame. With a higher equity weighting you are exposed to a greater degree of volatility and a greater risk of permanent loss of capital. 

    The events of 2006-2008 generated a huge amount of uncertainty. As no one knew what the outcome would be. Outside certain sectors such as financial , the effects were generally benign. Share prices bouncing back as Central Banks stepped into the breech and provided liquidity to the system. 

    Rather different to the current ratings of some shares which have propelled US and Global indices upwards. A correction may simply be the result of disappointment with actual underlying financial results at a later date. Though the impact, if any, of share backs (financial engineering) using cheap debt to enhance financial results has yet to be seen. 

     While one is still working it's possible to replenish lost capital from ones endeavours. In retirement the capital is permanently lost. Hence the first rule of investing. Don't lose capital. Second rule is don't forget rule no one. 
    "Markets have been so good for so long. That many investors are trivialising the advantages of actively managing portfolio risk." - Gervais Williams
  • SonOfSonOf Forumite
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    but does it actually protect you that much if a 2008 event would come along?
    Yes it does.   Whilst every asset could go down, the degree they can go down will vary.

    And how long into retirement until you stop worrying about your money all of the time!
    It depends on your draw rate.   If you have a high draw rate you will probably be always worrying.  If you have a low draw rate then you should be comfortable.     It also depends on how much risk you can afford to take. 
  • AudaxerAudaxer Forumite
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    Just wondering what does having cautious funds mean? Obviously they don’t grow as much as ‘aggressive’ funds but does it actually protect you that much if a 2008 event would come along?
    Funds or portfolios with lower percentages of equities will still fall in an equity crash, but will not fall as much as a similar fund or portfolio with a higher percentage of equities. From what I have read, lower percentage of equities generally recover a bit quicker than portfolios with higher percentages of equities. However provided portfolios are well diversified, there shouldn't be a permanent loss of capital provided you don't panic and sell at a loss. To ensure you don't have to sell at a loss, it is usually recommended in retirement that you keep a cash buffer of at least a few years income. 
  • ThrugelmirThrugelmir Forumite
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    Audaxer said:
    Just wondering what does having cautious funds mean? Obviously they don’t grow as much as ‘aggressive’ funds but does it actually protect you that much if a 2008 event would come along?
    Funds or portfolios with lower percentages of equities will still fall in an equity crash, but will not fall as much as a similar fund or portfolio with a higher percentage of equities. From what I have read, lower percentage of equities generally recover a bit quicker than portfolios with higher percentages of equities. However provided portfolios are well diversified, there shouldn't be a permanent loss of capital provided you don't panic and sell at a loss. To ensure you don't have to sell at a loss, it is usually recommended in retirement that you keep a cash buffer of at least a few years income. 
    In down turns companies go bust. That's where the loss factor comes in. Taking 2008 as an example in terms of UK stocks alone Northern Rock, Bradford & Bingley and HBOS became worthless. 
    "Markets have been so good for so long. That many investors are trivialising the advantages of actively managing portfolio risk." - Gervais Williams
  • AlbermarleAlbermarle Forumite
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    OH has a SIPP in ‘cautious funds’-40%equities, 40% bonds and 20% cash

    There are some who think that in the next downturn , bonds will not hold up as well as in previous ones . If this was the case  your 40:40:20 will survive better than a more traditional 40:60( bonds) 

  • AudaxerAudaxer Forumite
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    In down turns companies go bust. That's where the loss factor comes in. Taking 2008 as an example in terms of UK stocks alone Northern Rock, Bradford & Bingley and HBOS became worthless. 
    Yes, you could have permanent loss of capital with individual shares, but I think that with well diversified funds or ITs, the chances of permanent loss of your capital is a very low risk.
  • ThrugelmirThrugelmir Forumite
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    Audaxer said:

    In down turns companies go bust. That's where the loss factor comes in. Taking 2008 as an example in terms of UK stocks alone Northern Rock, Bradford & Bingley and HBOS became worthless. 
    Yes, you could have permanent loss of capital with individual shares, but I think that with well diversified funds or ITs, the chances of permanent loss of your capital is a very low risk.
    Perhaps that's why Fundsmith have performed so well over the longer term. Defensive stocks keep chugging along. 
    "Markets have been so good for so long. That many investors are trivialising the advantages of actively managing portfolio risk." - Gervais Williams
  • MarkCarnageMarkCarnage Forumite
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    Also, don't fall into the trap (as some have), of thinking that index trackers are low risk. They are not. They give you the risk of the market at low cost. 
    I tend to define risk as permanent and significant loss or major impairment of my capital, rather than just the degree of volatility that equities and other risk assets will experience as a matter of course. I appreciate that some who are in drawdown, and/or living off capital to a degree, will take a more cautious approach. This might be by holding a significant cash or short dated bond 'buffer' to allow a cushion for spending for anything between 1-5 years. Or it might take the form of holding funds with defensive asset allocations (more bonds), though I am one of those who think that bonds may be less defensive than historically in the next market setback. Even in 2008, many corporate bonds took quite a hit, not just equities. Sovereign bonds did well, but that was pre QE, and I'm not so sure they would now. 
    There are some funds and investment trusts which are specifically aimed to be lower risk which might be what you are looking for. Troy and BNY (formerly Newton) have cautious multi asset funds in this category. Personal Assets, Capital Gearing, and Ruffer seek to do the same in the investment trust area. 
  • aroominyorkaroominyork Forumite
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    I tend to define risk as permanent and significant loss or major impairment of my capital, rather than just the degree of volatility that equities and other risk assets will experience as a matter of course.

    Indeed - risk and volatility are two different things which are often thought to be the same. Trustnet doesn’t help by calling their metric ‘FE risk scores’ when what they are really showing is volatility.

    Volatility is a backwards looking metric looking at (please correct me if this is wrong) performance over the previous three years, weighted to the most recent past. Risk by definition is forward looking. I don’t know a better forward looking metric than past performance (if we had one we’d all be millionaires etc.) but it’s important to understand the difference: if you have an investment which consistently and reliably goes down 1% one day and up 1.2% the next day it would be highly volatile but low risk.



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