Just to be clear...
You’re not investing directly in stocks and shares. Instead, your money is invested in a ‘fund’, where the investments are chosen for you. Those investments will be mostly equities and government bonds. Although each has its pros and cons, equities and bonds are two popular choices for most investors.
Risk and profit—it’s a bit of a balancing act
In investment, there’s a strong link between profit and risk. To maximise the potential profits from your investment, usually means exposing it to higher levels of risk. But if you’re willing to accept a smaller potential profit, then the risk is reduced accordingly.
Equities are riskier than bonds
When you invest in shares, the chances are, that the value of your investment will go up and down. Whereas the value of your investment in Government bonds is unlikely to change. (In the long run1, investing in equities tends to be more profitable than investing in government bonds.)
And a word about time…
Money invested in shares needs time to grow: it also needs time to recover from the occasional setback. Generally, the longer you invest for the better, therefore we recommend you invest for a minimum of five years.
Which mix would suit you best?
Each of the funds below has a different blend of equities and bonds. The higher the percentage of equities in the fund, the higher the potential rewards—and the risks—are. Where the percentage of Government bonds is more than the percentage of equities, the lower the potential risks.
Here are the funds. Based on your risk preferences, we’ll choose the one which we believe will suit you best.
Vanguard UK Government Bond Index
Life Strategy 20% Equity Fund
Life Strategy 40% Equity Fund
Life Strategy 60% Equity Fund
Life Strategy 80% Equity Fund
Each of the five funds is an index tracker fund: an index tracker fund directly ‘tracks’ a financial index, such as the FTSE 100.
The Vanguard UK Government Bond Index Geographical Allocation Fund is the lowest-risk, lowest-potential return fund in the range. It may be suitable if you’re willing to accept lower long-term potential returns in order to reduce the risk of losses. Your money would be invested as follows: approximately 1% in equities and 99% in UK Gilts.
The LifeStrategy® 20% Equity Fund is the second most cautious fund in the range. It may be suitable if you want to balance the potential for solid long-term returns whilst limiting the risk of significant losses. Your money would be invested as follows: 20% in equities and 80% in bonds.
The LifeStrategy® 40% Equity Fund is middle of the range in terms of balancing risk and return. It may be suitable if you want to target healthy long-term returns and retain a reasonable bond weighting to help control risk. Your money would be invested as follows: 40% in equities and 60% in bonds.
The LifeStrategy® 60% Equity Fund is the second highest risk and potential return fund in the range. It may be suitable if you’re aiming for higher long-term returns and you're less concerned about the prospect of losses. Your money would be invested as follows: 60% in equities and 40% in bonds.
The LifeStrategy® 80% Equity Fund is the highest risk and potential return fund in the range. It may be suitable if you are happy to accept a high level of volatility to pursue superior long-term returns. Your money would be invested as follows: 80% in equities and 20% in bonds.
Don't forget: you don't need to choose the fund, we choose it for you.
The potential rewards
The stock market has always had its ups and downs and always will. But of course, you want an idea of the profit your investment might make. So, we provide you with three investment return projections, based on pessimistic, realistic and optimistic markets. The projections take account of a range of economic variables, including the amount you’re investing, how long you want to invest for and the current state of the economy. So, the projections relate to what is happening in financial markets right now and in the future —we don’t just look at what happened in the past.