Moving down the risk reward road need not be rocky

The following article written by Neil Lovatt of Royal London 360 (formerly Scottish Life International) shows how investors can seek greater rewards whilst controlling the risks using the range of Royal London 360 capital protected funds.

Sometimes it's good to take a step back and ask yourself exactly what you're doing with regards to investment. What actually is the point of it all?

It's too easy to forget that the (Financial Services) industry exists to achieve one simple goal - smart financial planning. Or, to put it another way, moving clients away from the comfort and security of deposit accounts and getting them to realise superior long-term returns of the stockmarkets.

In short, financial services aims to move the focus of an investor's attention along the risk reward spectrum and to give them the confidence they need to 'jump' into the stockmarkets.

Empowering the investor

But maybe there's no need to ask anyone to take such a leap of faith. Perhaps we can simply empower the investor to make the journey towards equities in a series of small incremental steps.

The problem with investment has always been that investors love the comfort and security of cash. They save GBP 100 (in a deposit account) and even in the worst case they'll have GBP 100 whenever they require their money. But invest GBP 100 on the stockmarkets, and it could be worth considerably less in a few months time. Unfortunately, the potential for sudden and dramatic losses on the stockmarkets and the fear of capital risk makes many investors suspicious of any stockmarket exposure.

In the past, protected investment funds offered investors a partial solution. Highly secure 100% protected funds carry no capital risk and are acceptable to many risk averse investors. But the risk is so low that whilst they're a step in the right direction, investors serious about long-term returns should consider further steps down the "risk reward" road.

However, as soon as you approach protected funds which are not 100% capital protected, the fear of capital risk resurfaces. For example, Scottish Life International's Protected Index 95 funds are arguably as risky as direct stockmarket investment because they can potentially lose 5% a quarter. This potential for a short-term 5% loss can for many outweigh the potential for long-term growth.

So we have an impasse. Investors will not countenance the possibility of short-term capital loss, but if they are unable or unwilling to do so, how can they ever move down the risk reward road?

Safe combination

Fortunately, there's a straightforward answer. The investor starts in a fund with 100% capital protection. They're on the safe side of the barrier and no capital is at risk.

Now, imagine that the fund rose 3% over the first quarter. This means that the investor's new value of 103% is protected so long as they stay in the 100% capital protected fund. But, the investor can now risk 3% of their investment over the next three months and not threaten their initial capital level! They are in effect betting with the 'house's' money!

With conventional stockmarket investments at this point, anything above a 3% allocation to equities can potentially threaten an investor's capital. However, the beauty of protected investment is that investors can clearly define their capital at risk. To put it another way, they can invest in a 98% protected fund and, whatever else happens over the next three months, their initial capital will still be intact.

If the fund falls at anytime, they can return to 100% protection and start the cycle once more. But should the 98% protected fund grow over the next quarter, the investor can step further down the road until they have reached 95% protection. In effect the investor is in a high risk, high return fund, but due to their defined level of protection they never need risk their initial capital.

This "Safe Combination" puts investors in full control to move along the risk reward road at their own pace. It is a safe combination of absolute capital protection combined with the potential for attractive long-term capital returns.

An example of safe combination with an initial investment of GBP 100

The figures shown in the combination above are for example only and are not guaranteed.You might get back more or less than this depending on stockmarket combinations and the level of protection chosen. The value of investments can fall as well as rise.Past performance is not a guide to future performance.

Access the above funds via the Safe Combination Bond

Tel : + 66 81 8428 438
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Fax : + 66 2 994 5731
Email : info@csmltd.com