Investing cautiously. In many ways it’s a sort of paradox, a bit like having cake and eating it.

But for many investors, investing for a decent capital return is more than stressful. Even though they believed they had a protected investment, the annual statements have been unbearable to read.

A fund is a range of stocks and shares and other assets such as property, cash, gold etc. The body that regulates these sectors is called the Investment Management Association (the IMA). They create sectors that funds have to fit into. And so the cautious managed sector should, you would have thought, have been invested in cautious 'things'.

The returns from your cautious fund should, you would have thought, be close to those of the chap next to you on the golf course who also has a cautious fund. Unfortunately not. The top fund in the cautious sector (Invesco perpetual European high income) returned 20.6% last year whereas the worst (150 places below) returned -5.3% (1). How can they be acting so differently? In fact over five years the top fund has performed 58.7% and the worst -7.4%. That is a colossal difference in an area where there should be little difference or movement.

It's even worse when we measure the risk of cautious funds. Now risk means different things to all of us. When it comes to investments, risk is best described as the least fluctuation in pursuit of your gain.

It’s a bit techy but here is some explanation of how it works and how risk is measured. Standard deviation is a good measure for how much a fund fluctuates away from its average return. For example, a fund that returns 12% per year whist achieving 1% gain each month is less risky and more appetizing than a fund that achieves 14% per year, but is up 10% one month and down 8% the next month. The lowest risk fund in the cautious managed sector is F&C Blue which incidentally returned 7.2% (65th out of 77 funds over the five years measured by return) whereas the highest risk fund (AXA ethical distribution) was 326% more risky (2).

How would you know in advance if you are likely to be in the best or worst fund and why is there such a difference in risk?

Also is it really even worth while investing cautiously? The retail price index (cost of living) rose 5.2% in the last twelve months (3). So, if your investments returned less than this, you will have lost money. Remember that you also have to take account of charges and tax before you can begin to think about gains.

It is not true to say that the highest risk funds make the best returns, nor is it true to say the lowest risk funds give the lowest returns. It is also not true to say that the cheapest funds are best and vice versa. What is true and proven is that if you understand the impact of the cost of inflation on your money, the potential for fluctuation in your investments and how much fluctuation you can cope with, then you are more likely to achieve the most consistent returns.

And so a visit to your Independent investment advisor is probably a very good use of your time to assess exactly what risk/fluctuation you need to take in pursuit of that gain and to answer the questions you have. If the adviser has the correct expertise they will match you with exactly the right funds and reduce the stress of investing.


1.  Trustnet

2.  Lipper

3.  Government Stats Office

For a free factsheet about the best performing cautious funds, call Worldwide on 0845 230 9876, e-mail or take a look at our website

The value of shares and investments can go down as well as up.

Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'

Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
All information is based on our understanding of current tax practices, which are subject to change.

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