In this post, we'll look at how medium to low risk investors can choose the percentage of their portfolio they use to aim for growth, so they can create the best SIPP portfolio for them.
We all have different attitudes to investment risk. Some people are willing to accept greater risk and volatility in the pursuit of higher returns. Other people are looking for less risk, while still aiming to achieve their personal financial goals.
A SIPP portfolio can accommodate a wide range of investments under its umbrella, including shares, bonds, cash, commercial property, hedge funds and private equity. The level of risk and volatility you face is directly linked to where your SIPP portfolio is invested.
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The rule is simple - the higher the returns, the higher the volatility. To put it another way, the greater returns you aim for, the rockier the ride. Here’s a table that explains how volatility is tied to ‘the quality of the ride’ for investors.
Aim |
Ride quality (Volatility)
High returns
Uncomfortable for risk averse investors
Medium returns
Fairly uncomfortable for risk averse investors
Low returns
Comfortable for a risk averse investor
ISACO’s lead investor of our Investment Guidance Service is classed an ‘adventurous’ investor and aims for high returns. That means the ride quality can be uncomfortable at times especially for low to medium risk investors. The rule is: the higher the returns, the higher the volatility. Put in simple terms, the greater returns you aim for, the rockier the ride.
Take a look at these recent 3 year1 returns from our lead investor.
3 year1 returns: Adventurous investor seeking aggressive growth
|
|
Annual return |
Cummulative return2
Stephen Sutherland
17.1%
60.9%
Nasdaq Composite
16.7%
58.8%
FTSE 100
7.9%
25.6%
1Jan 2009-Dec 2011
2 returns on ISA account
Attaining this impressive performance over the last the last three years involved periods of increased volatility. If the threat of large price swings over the short-term doesn’t appeal to you, and you’d be willing to aim for a lower annual return in exchange for a smoother ride, you may like my next suggestion.
A simple way to lower volatility – Moneybuilder Income Fund
Instead of investing 100% of your SIPP into quality aggressive growth funds, you make a split. For example, 50% of your capital is invested into aggressive growth funds and the remainder 50% is invested into a quality low risk corporate bond fund.
The low risk fund we like is Fidelity’s Moneybuilder Income Fund and it’s the UK’s lowest-cost AAA rated corporate bond fund (Source: Morningstar, January 2012).
Income is tax-free if you invest in a SIPP or an ISA.
- Instead of taking income, you reinvest it to boost your capital
- Invests primarily in UK corporate bonds
The fund is currently managed by a Citywire A rated manager, who has over 25 years' experience in the field of fixed income. The fund manager is backed by large and experienced team of 38 investment professionals, who are dedicated to uncovering the very best bond investments.
Medium risk investor - 50/50 split
This allocation is suited to people seeking moderate growth. It’s aimed at investors with a medium risk profile whose aim is to outperform the FTSE 100. With this strategy we suggest a 50/50 split. You simply allocate 50% of your capital into quality aggressive growth funds, and 50% of your capital into the Fidelity Moneybuilder Income Fund.
If you would have followed this strategy over the last three years using ISACO’s lead investor to help choose your aggressive growth funds, your performance would have been as follows:
3 year1 returns: Medium risk investor seeking moderate growth
3 year1 returns: Medium risk investor seeking moderate growth
|
|
Annual return |
Cummulative return
50%/50% split
13.7%
47.5%
FTSE 100
7.9%
25.6%
1Jan 2009 - Dec 2011
Low to medium risk investor - 10/90 spit
For the low to medium risk investor whose aim is to stay ahead of inflation, we suggest a 10/90 split. With a 10/90 split, you allocate 10% of your capital into quality aggressive growth funds, and 90% of your capital into the Fidelity Moneybuilder Income Fund.
If you would have followed this strategy over the last three years, using ISACO’s lead investor to help choose your aggressive growth funds, your performance would have been as follows:
3 year1 return: Low to medium risk investor seeking conservative growth
|
|
Annual return |
Cummulative return
10%/90% split
11%
36.9%
Inflation
3.6%
11.2%
1Jan 2009 - Dec 2011
3Inflation figure calculated from consumer prices index Dec 2009, Dec 2010, and Dec 2011
Please note past performance should not be used as a guide to future performance, which is not guaranteed. Investing in the Funds should be considered a long-term investment. The value of the investment can go down as well as up and there is no guarantee that you will get back the amount you originally invested.
Summary of Choices
- Conservative growth - suits low to medium risk investor (10%/90%)
- Moderate growth - suits medium risk investor (50%/50%)
- Aggressive growth - suits adventurous investor (100%)
I hope you've found this post useful and it helps you find the best SIPP portfolio for you. As always, if you have any questions or thoughts on the points covered in this post, please leave a comment below or connect with us @ISACO_ on Twitter.
About ISACO
ISACO was established in 2001 by brothers Stephen and Paul Sutherland and is the first financially regulated firm to offer adventurous ISA and SIPP investors a unique personal investment service that shares on a daily basis our star-performing investor’s thoughts, personal insights and investment decisions.
Clients enjoy being informed throughout the year what ‘best of breed’ funds our premier investor currently owns, when he’s buying and when he’s moving into the safe harbour of cash – helping clients enjoy more control, manage their portfolio more effectively and benefit from the potential of outstanding long-term returns.
For more information about ISACO and our Investment Guidance Service, please read our free brochure.
