1 INVESTMENT ADVICE INVESTMENT PRODUCTS 1 ADVICE, IT S TIME WELL SPENT. Whether you want to invest as a one off or on a regular basis, your financial consultant is here to help you get the most from your money. Together we ll take the time to find out your financial needs and requirements and work out the best options for you. Saving for your financial future is easy with a trusted company with over 177 years of experience.
2 2 INVESTMENT ADVICE WHAT S IN THIS GUIDE? This guide introduces you to the basic steps of investing so you can understand the choices available to you, if you decide to invest with us. The information is intended to be clear and unbiased. All of it is included to help you make the right decision about what s best for you and your money. What this guide can t do is tell you what investment to make. This is for you to decide after a discussion with your financial consultant. WHO S THE GUIDE FOR? If you re a first-time investor, the guide is an ideal introduction to investment and a handy reference for the future. Even if you ve invested before, you ll find the guide provides a useful reminder of the basics. YOUR FINANCIAL CONSULTANT The guide complements the advice your financial consultant gives you. We understand there s a lot to take in and you ll almost certainly have questions. Your financial consultant can explain anything you re uncertain about and help you decide which investment is right for your needs. LOOKING FOR PRODUCT INFORMATION Please ask your financial consultant for a copy of our product brochures and important fund information documents for specific details about the products and funds available to you. A NOTE ABOUT EXAMPLES Please note the Greene Family examples in this guide are for illustrative purposes. They are not the experiences of actual investors and are not intended to indicate the choices that you should make. ASK US A QUESTION If you have any questions about the information in this brochure or anything relating to planning for your financial future, you should speak to your financial consultant.
3 INVESTMENT ADVICE 3 CONTENTS 1. ARE YOU READY? 2. KNOWING WHAT YOU WANT Knowing yourself Are you a saver or an investor? 3. UNDERSTANDING INVESTING What is investing? The benefit of investing 4. KEY DECISIONS TO MAKE Time and timing Risk and reward How would you assess your attitude to risk? 5. INVESTMENT TYPES What can I invest in? What are investment funds? Types of fund management How we risk rate our funds Embracing diversity The right investment for you 6. LONG TERM Long-term support Essential information
4 4 INVESTMENT ADVICE ARE YOU READY? 1. ARE YOU READY?
5 INVESTMENT ADVICE ARE YOU READY? 5 Once you ve read this guide, you should have a better understanding of the basics of investing. As you cover a topic you can refer back to this checklist and, after a discussion with your financial consultant, you ll be able to tick off each one in order. If you think investing might be right for you, this guide will help you be ready to begin taking a closer look at the options available with the help of your financial consultant. INVESTOR S CHECKLIST. KNOWING WHAT YOU WANT 1. I understand my current financial situation and have thought about what could change in the future I know why I m investing and when I will need the money I know how much I might be able to invest and how flexible I can be with my investment I understand how much risk I want to take and how much I can afford to lose MAJOR DECISIONS TO MAKE 5. I know what I can invest in and how holding different types of investments can work for me INVESTMENT PRODUCTS 6. I know how I can invest in different types of investments through the main types of products that are available LONG-TERM GOALS 7. I know how important it is to keep track of my own circumstances and what my investments are doing to give me a better chance of meeting my goals
6 6 INVESTMENT ADVICE KNOWING WHAT YOU WANT 2. KNOWING WHAT YOU WANT. Start with knowing your needs, goals and what type of investor you are. KNOWING YOURSELF People s circumstances and needs will differ, both now and in the future. But if investing, all investors need to think about the following before starting. WHO YOU NEED TO THINK ABOUT You might only be thinking about your own money, or you might want to invest with other members of your family. Who do you need to provide for? Is anyone else dependent on you or are you completely free to do what you want with your money? Do you know what tax you pay and how anyone else involved is being taxed? How important is taxation to your situation? WHAT YOU OWN AND WHAT YOU OWE You should start by making sure that you have all the key pieces of information to hand. For example, any policy documents or annual statements that tell you what you currently have and what it s doing for you. Make sure you know things like current interest rates, fees or charges and for existing investments what the returns have been in the past. WHAT COMES IN AND WHAT GOES OUT Work out your monthly budget based on the money you have coming in and the regular and periodic money you have going out. Challenge yourself whether this is really what happens in practice and come up with a more realistic figure if necessary. For example, if your budget suggests you ve got money left over at the end of each month but you re not saving anything, think about where that money is going and include this in your budget. EXPECTED AND POSSIBLE CHANGES It s likely that your current circumstances won t stay the same over the next few years and certainly not over the normal expected lifetime of any investments that you might make. What could change? Might your income go up or down? Do you have commitments that finish in the next few years or are you expecting to have to spend more than you currently are on certain things? TAKE ACTION IF YOU NEED TO When you re putting this information together, you might come across things that you want to change, for example getting a better deal on your gas and electricity bill. Cancel unwanted subscriptions or increase what you pay into your pension. You might feel confident to do some of these things yourself but on some of them you might want to talk to your financial consultant. REPAYING ANY LOANS OR CREDIT CARDS You re usually charged relatively high rates of interest on these forms of personal debt. This means that it s really difficult to beat those rates by investing the money that you could otherwise use to pay off the debt. There are many things to consider, such as any costs or penalties that the lender may take if you pay the debt off early, so you should consider your options carefully. REPAYING SOME OR ALL OF YOUR MORTGAGE The interest rate charged on this form of debt is usually lower than the rates charged on loans or credit cards. But, it s still not certain that over the longer term you ll achieve a better return by investing your money rather than repaying your mortgage. However, there are other factors to consider, such as whether you re repaying your mortgage out of your regular employment income and whether you might need a lump sum at some point in the future. It may not be possible for you to borrow again in the future, so repaying your mortgage now might leave you without a lump sum when you need it.
7 INVESTMENT ADVICE KNOWING WHAT YOU WANT 7 WORKING OUT YOUR RAINY-DAY MONEY It s a good idea to keep some of your savings in a deposit account as rainy-day money cash you can have easy access to. There s no ideal amount you should keep to hand, it depends on your circumstances. Think about your life now and what might happen in the future. You need to access enough to cover you if: You temporarily lose your income. Your household bills increase. There s an emergency, such as an accident, you fall ill or you have unexpected costs such as essential repairs to your house. Once you ve put a figure on how much rainy-day money you need, you can start investing from what you have left your true long-term savings. INTRODUCING THE GREENES John Greene is aged 50 and works as a project manager for a civil engineering company. He s married to Fiona Greene, an events organiser and she is 47. John has recently inherited 60,000, some of which he plans to invest. After speaking to his financial consultant, John decides it s a good idea to address his short-term finances. First, he pays off the outstanding 25,000 mortgage on his house. Next, he uses 2,000 to pay off his credit cards and a personal loan he recently took out to buy a car. Fiona and he already have 5,000 savings in a deposit account. John wants to top up this rainy-day money to ensure they have enough in case of the unexpected. He adds 2,000, so they now have 7,000 set aside for emergencies. John and Fiona decide to treat themselves to a holiday spending 1,000. With his short-term finances planned out, John and Fiona can now think about what they should do with what s left over.
8 8 INVESTMENT ADVICE KNOWING WHAT YOU WANT ARE YOU A SAVER OR AN INVESTOR? Every investment starts with you, the investor. So before you start, it s important to know if you are an investor and what you re aiming to achieve. Then you re ready to make some decisions about how to invest. THE IMPORTANCE OF ADVICE Good financial advice can help you confidently plan your short-term and long-term finances. Your financial consultant will be able to help you answer the following questions and point you in the right direction to make your decisions easier. LONG-TERM AIMS WHY ARE YOU THINKING ABOUT INVESTING? Are you investing for a specific purpose? Perhaps to fund your retirement or to pay for your child s education? Some people invest to buy a house, a car or maybe even for a dream holiday. Do you have one aim or several? What events or occasions might you need a lump sum of money for in the years to come? Is there a specific amount of money you re aiming for? WHAT DO YOU WANT BACK? Even if you don t have a specific goal or event in mind, it helps to have an aim. Are you looking for growth from your investment or a regular income? Maybe both? HOW LONG WILL YOU INVEST FOR? As an investor you ll need to think long term. It means stepping back from your day-to-day finances and looking at the bigger picture. MAKING A COMMITMENT We believe that you should not consider investing unless you re prepared to stay invested for at least five years and possibly more. This is because most investments are designed and managed to gain a return over the medium to long term. You may invest today and enjoy the returns that you re expecting for the next few years. However, something could happen to your investment, or economic conditions, in four years time. This would mean that you may need to hold on to your investment for longer than you originally hoped. Do you anticipate taking your return at the end of the first five years, or will you be likely to wait 10 years or even 20 years before cashing in? Consider your income in the future, could it change and if it does, how will you respond? If your investment doesn t go as well as hoped, you need to think about what plans you would be prepared to change or give up in the future. SHORT-TERM AIMS If your goal coincides with an event in one or two years time, a wedding for instance, it will probably be better for you to use a high interest savings account instead of a stock market investment. That s because stock market investments cannot be relied on to produce returns in such a short time. How long you invest for may be determined by the aim of your investment. You may want to have a fixed term investment or one that is more open-ended. The following questions may help you to focus on the type of investment: If you re looking for growth, you ll need to consider how long you invest for. Where do you want to be in 5, 10 or even 15 years time? If you would like to draw an income, how much does this need to be and how long will you need it for?
9 INVESTMENT ADVICE KNOWING WHAT YOU WANT 9 HOW DO YOU VIEW RISK? Most investments carry a risk. This means you may not get back all or any of the money you invest. Some investments are riskier than others. Nobody wants to lose money, but some people are willing to accept a higher risk than others for the potential to achieve greater returns. It s crucial to know how much risk you re prepared to take. Without knowing this, it s very difficult to make a sound investment decision, as your view of risk should be a key factor in any decision about the type of investments you make. You can read more about how to judge your attitude to risk on page 14. EXAMPLE: THE GREENES DREAM John and Fiona have sorted out their short-term needs and now need to consider whether they save the remaining 30,000 in a high-interest deposit account or take some risk in the hope of getting a better return. John and Fiona have always dreamed of buying a holiday home abroad. Their aim is to have enough money to put towards a property, ideally in 10 years time as a 60th birthday present for himself and Fiona, or else by the time he retires at 65. As both John and Fiona plan to continue working until then, John decides they don t need an income from the investment. His focus is on maximum long-term growth with the aim of having around 60,000 after 10 to 15 years. As a standard-rate taxpayer, John has no special tax needs but is keen to make his money work as efficiently as he can. With time on their side and a flexible cash in date, John and Fiona are keen to take a risk with their 30,000 over the long term. They hope that by taking a risk they will get a better return than if they left the money in a deposit account. They understand that if the investment doesn t go to plan, that they might not have enough to realise their dream. But they know that they may have other money, for example from their pensions, that could be available to top up their holiday home fund. John and Fiona are keen to continue their discussions with their financial consultant to find out what they should invest in and how much risk they should accept.
10 10 INVESTMENT ADVICE UNDERSTANDING INVESTING 3. UNDERSTANDING INVESTING. The benefits of investing and why some people choose to invest WHAT IS INVESTING? At its simplest, investing means buying something with the aim of making a profit by selling it at a higher price than you paid. Investing is not the same as saving. Savings usually earn a specified amount of interest, which may be fixed for a period or may change from time to time. In comparison, investing means that you take a chance that you won t get any return or that you will lose some of your money, or both. You re hoping that the return will be better than you would get from saving but this is not certain. With investments there are no guarantees and the value of your investments can fall as well as rise. Here s a comparison table to show how the key features of saving and investing differ: SAVINGS AND INVESTMENTS COMPARISON TABLE FEATURE SAVING INVESTING WHAT HAPPENS TO MY MONEY? You save money with a bank, building society or other organisation who commit to paying you interest at a set rate. Your money is given to others to invest, for example in company shares, commercial property or fixed interest securities. HOW LONG SHOULD I BE PREPARED TO COMMIT MY MONEY FOR? IS MY MONEY AT RISK? HOW MUCH DOES IT COST? You can choose whether you want to have instant access or tie your money up for a longer period of time. You should always get your money back. There are normally no stated charges for holding money in a deposit account as the rate of interest you receive allows for them. Usually a minimum of five years, ideally longer. You can cash in most investments straight away but you may have to pay a penalty or you might only get back part of what you put in. The value of your investment can go up or down. You will be taking a risk of losing some or all of your money. Different investments involve different amounts of risk. The costs of investing can vary. All investment charges are fully disclosed in the product literature you receive before you invest. HOW DOES INFLATION AFFECT MY MONEY? For the value of your cash savings to keep up with inflation, you will rely on your savings rate of interest being greater than the rate of inflation. For the value of your investments to keep up with inflation, you will rely on your investment growth being greater than the rate of inflation.
11 INVESTMENT ADVICE UNDERSTANDING INVESTING 11 THE BENEFIT OF INVESTING The main benefit of investing is the potential to earn greater returns over saving. However, this comes with greater risk. Investors buy specific products with the long-term aim of increasing the value of the original investment. Well managed investment plans could offer a way to save and grow money that may be needed in the future. You could save for retirement, or you may want help to fund your child s education. With thorough research, careful selection and good management, an investor could make a profit on an investment.
12 12 INVESTMENT ADVICE KEY DECISIONS TO MAKE 4. KEY DECISIONS TO MAKE. A few important things to consider to get the best outcome. TIME AND TIMING. However long you invest for, timing is important because it can have a significant effect on what you get back from your investment. THE MARKET CYCLE Financial markets historically work in a cycle, illustrated in the diagram below. It s important to be aware where the market is in its cycle both when you invest and when you withdraw your money. For further information on the market cycle, please speak to your financial consultant. STRONG RECOVERY BOOM UNEVEN RECOVERY SLUMP RECESSION THERE IS NO IDEAL TIME TO INVEST Your aims and timeframe may not tally with what s going on in the outside world, but you can still achieve your aims so long as you re happy with the price you buy your investment for, and how long you plan to stay invested. Imagine you invest your money in a boom period of the cycle, therefore paying a higher price for your investments than they would be worth in the recession that follows. You may have to wait longer to make a profit than if you d invested earlier in the cycle. However, if you plan to hold your investment long enough, it s possible that any short-term fall in market values could be more than made up by growth in the long term. WHY TIMING IS IMPORTANT SHORT-TERM VOLATILITY, LONG-TERM GROWTH As the graph on the next page shows, the short-term performance of the stock market can be erratic. It s value can go up and down from year to year. However, while there are exceptions, in the long term the general trend has been upwards. Please remember though, past performance is not a guide to future performance. EXERCISING PATIENCE Taking your money out at the first sign of the market falling isn t necessarily the best thing to do because while values can drop further, historically dips are often followed by increases. It can help to be flexible about when you cash in your investment. This will depend on your aims and you have a choice whether to cash in straight away or hold on. This will depend on what s right for you at that time, knowing that no one can predict where the market will go next, either up or down. Ask yourself: What will I do if I need the money I have invested at a time when my investment isn t performing as well as I d hope? Could I wait to cash in my investment? Will my short-term savings be enough to meet my needs? WHEN THE MARKET FALLS If you sell your investment because you re concerned about how much more you could potentially lose, you risk missing out on any recovery. On the other hand you may be saving yourself from further loss. There s no way to predict the future and no investor knows what will happen over the course of the next five or ten years but by understanding how the market works, you can avoid cashing in at the wrong time.
13 INVESTMENT ADVICE KEY DECISIONS TO MAKE 13 ALL SHARE INDEX TIME PERIOD FROM 31 DECEMBER 1985 TO 31 AUGUST 2012 EVERY MONTH (UK POUND STERLING) Percentage Growth Mar 1994 Mar 1995 Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar FTSE All-Share TR* *Contains estimated data Time Period from 31/03/1994 to 31/03/2014 every 1 Month (UK Pound Sterling) You should be aware that charges may apply if you invest in an equity-related product or fund. The effect of these charges will be to reduce the growth. Past performance is not a guide to future performance. Mar Mar Mar Source: Lipper ANNUAL CHANGE IN PERFORMANCE OF FTSE ALL SHARE TR INDEX OVER THE LAST FIVE YEARS 31 March March % 31 March March % 31 March March % 31 March March % 31 March March %
14 14 INVESTMENT ADVICE KEY DECISIONS TO MAKE RISK AND REWARD. Few things in life are without risk, investing is no exception. Your approach to risk is unique to you and will play a big part in your decision about the type of investment you make. There s no right or wrong, the important decision is to match risk and reward at a level you feel comfortable with. We d all like our money to grow substantially without risking our original investment amount. Unfortunately, this isn t possible. Almost all investment involves some degree of risk. What s important is that you understand, and are comfortable with, the risks you re taking. For example, if you put your money in a bank account, there s almost no risk, but the interest you ll get your reward, will probably be quite low. On the other hand, investing your money in a single company s shares is high risk, as you re dependent on that one company. If something happens to the company, it will change the value of your shares, and in the worst case, you could lose all your money. However, your reward is potentially much greater, as you could make a large gain. Higher risk does mean the potential for higher rewards, but it also comes with a greater chance of your money going down in value. On the other hand, a lower risk has a smaller chance of loss, but the potential for growth will be less. You should make sure you understand and are prepared to take these risks before you choose what you invest in. CAN I REDUCE RISK TO MY INVESTMENT? Yes, this can be done in the following ways. SPREADING YOUR INVESTMENT RISK You can reduce risk by putting your money in different types of investment with varying levels of risk, for example, company shares, fixed interest securities, commercial property and cash. POOLING YOUR INVESTMENTS When you invest on your own it s likely you ll only be able to make a small number of different investments. However, if you buy into funds that pool many investors money, you ll be able to buy a share of a much wider range of investments. The value of your investment may still go down if the market goes down but it s likely that you will lose less if individual investments don t do well. Pooled investment funds can invest in a wide range of investment types, for example: Fixed interest securities. Commercial property. A mixture of company shares, fixed interest securities, commercial property and cash. Wherever you choose to invest, putting your money in a range of investment types means that, if something happens to one of your investments, hopefully, your other investments will not have lost money or may have gained in value, so your overall loss may be reduced. So whilst risk can be managed, it s important to remember that you can t get rid of risk completely.
15 INVESTMENT ADVICE KEY DECISIONS TO MAKE 15 WHAT ARE THE DIFFERENT TYPES OF RISK? There are many different types of risk and it s important to make sure you know what could happen to your money. We ve set out some of the main types of risk and we ll give you more information on each product or fund when you are making your choice where to invest. There could be a risk to: THE AMOUNT YOU INVEST: You may get back less than you invest. Investments generally go up and down in value, some types more than others. For example, company share prices generally change daily. YOUR INVESTMENT GOAL(S): Your investment may not give you the lump sum you d like or need in the future. You may need to invest more along the way, if it s not on target. THE INCOME YOU HOPE TO RECEIVE: Your investment may not give you the income you d like or need, now or in the future. This is important if you need a particular amount of income from your investments or pension. INFLATION: The growth of your investment may not keep up with inflation. This may reduce what you can buy with the value of your investment in the future. MISSING OUT ON OTHER OPPORTUNITIES: Your investment may not do as well as where you had it before. You may have been able to invest your money somewhere else that would have produced a better return. GETTING AT YOUR MONEY WHEN YOU WANT IT: You may not be able to get your money as quickly as you need it. You may have to pay penalties to get at your money straight away. HAVING TO CASH IN YOUR INVESTMENT AT A PARTICULAR TIME: The value of individual investments can go up and down every day. Investment markets can sometimes experience conditions where the value of all investment types goes down dramatically. It can take some time for markets to recover from these events. Investment types may generally rise or fall in value over longer periods due to economic conditions such as rising inflation or interest rates. This means that you could buy or sell investments at what may turn out, with hindsight, to be the wrong time. It s not possible to know the future so you need to make sure you re happy with when you buy and sell. If you have a specific target date when you need your money, for example at retirement, there is a risk that investment conditions may not be favourable at that time. This means you should think about cashing in your investments or moving them to less risky areas in the years before you need your money. ABNORMAL EVENTS: On rare occasions the value of one or more investment types may fall dramatically. This may be preceded by a period of strong growth, sometimes called a bubble. The emergence of a bubble is not always obvious and may only be seen after the event and it s rarely possible to accurately predict a substantial market fall. This may mean that fund risks become greater than indicated when investment prices get near to what turns out to be their peak. There may be an anxious period when prices fall dramatically and are depressed for a period of time before any recovery.
16 16 INVESTMENT ADVICE KEY DECISIONS TO MAKE THE SPECIFIC RISKS OF THE FUND YOU HAVE CHOSEN: When you buy a product from us, you ll have a choice of funds to put your money in. Details of the specific risks of each fund will be contained within the product literature, and your financial consultant can discuss these in more detail with you. The funds you choose have risks linked to what they invest in, for example, a fund might invest in currencies other than British Pounds. This means that the fund manager will need to change your money into the other currencies and back again, when you want to cash in. If the other currencies go up or down in value compared to the British Pound, this will affect the amount you get back and might reduce any investment gain or increase any investment loss. YOUR ATTITUDE TO RISK: When you re deciding whether and where to invest, it s really important for you to understand your attitude to investment risk. We believe there are four main factors that make up a person s attitude to risk: Whether you prefer certainty or like speculating with your money. How prepared you are to accept the long-term ups and downs of investing. How happy you may be with the short-term ups and downs with investing. What you want from your money and when. When you ve worked out the answers to these questions you may be able to identify yourself with one of our five Customer Risk Profiles on page 18. We ve created these to help you decide what type of investor you might be. The amount of risk you re prepared to take increases as you move down the scale from A through to E. Each of the Customer Risk Profiles has been designed to represent a wide range of customer types, so you may find that your preference is to be closer to the top or bottom of a particular Profile. This may happen, for example, if you agree with some of the statements in the Profile immediately above or below your chosen Profile. If you re towards the top of a particular Profile, for example, this might mean that you re prepared to invest more of your money in slightly more risky funds. If you re towards the bottom, it might mean that you should consider investing less of the money that you have available. Your Legal & General financial consultant can help you to work out your Risk Profile and which funds are right for you.
17 INVESTMENT ADVICE KEY DECISIONS TO MAKE 17 EXAMPLE: JOHN GREENE S ATTITUDE TO RISK John and Fiona have worked out that they d like to invest some of their money to try to meet their financial goal of buying a holiday home. They ve invested before on their own but for this more substantial investment they value the advice of their financial consultant. One of the key things they want to discuss is how much risk they should take. John and Fiona have a detailed conversation with their financial consultant about their general outlook on life and how they view their finances. They confirm that their dream is flexible so they can afford not to meet their target or even to lose some of the 30,000, as they re not relying on this for other purposes. Their financial consultant considers that John and Fiona are prepared to take risks but that they are not sufficiently experienced or tolerant to losses to invest all of their money in more risky investments. He knows that their target is aspirational but cautions them that this is not a reason to take more risk than they are comfortable with.
18 18 INVESTMENT ADVICE KEY DECISIONS TO MAKE HOW WOULD YOU ASSESS YOUR ATTITUDE TO RISK? Working out how you feel about risk is important. On the diagram below you ll see various customer risk attitudes, ranging from wanting to keep your money in a bank to being adventurous with your investments. A B C YOUR ATTITUDE TO RISK You don t like to take risks with your money or financial future. You need to know your money is safe and don t want to worry about losing any of it. You cannot be persuaded to try for better returns if that means you would run the risk of losing some money. You want to achieve returns that are better than you can get from deposit accounts. You re prepared to accept that the return you get on your money may be lower than you hope. You re not prepared to accept the returns available from deposit accounts and want to invest for the potential of slightly better returns. You re prepared for the uncertainty of not knowing how much you will get back from your investments. You re prepared to accept that the capital amount you get back and any return you receive may be less or more than you hope. INVESTMENT FLUCTUATIONS You re not prepared to accept the risk that the value of your investments could go down. You re not prepared to accept the risk that the value of your investments could go down as well as up on a day to day basis. However, you accept that if you need to cash in your investments unexpectedly before the end of a fixed term, or at a time when a guarantee does not apply, you might get less back than you put in. You re prepared for the value of your investments to fluctuate over time. You would not cash in your investments simply because they had gone down in value over the short term. If your profile is towards the middle or upper end of this category, the value of your investments may go up and down by more, more often. D You want to give yourself the chance of getting a higher level of return and are prepared to accept an increased level of risk to chase these potential rewards. You know the returns are not certain and you are prepared for not knowing how much you will get back from your investments. You re prepared for the value of your investments to fluctuate over time and that sometimes these swings in value might be quite significant and long lasting. You would not cash in your investments simply because they had gone down in value over the short term. If your profile is towards the middle or upper end of this category, the value of your investments may go up and down by more, more often. E You re open to all types of investment and agree it s likely you may lose money from time to time. You expect to get much better returns by speculating across a wide range of investment types. However, while you expect to get a much better return, you accept that you could lose a significant proportion of the money you invest. You re prepared that the value of your investments may go up or down over time and that sometimes these changes in value might be significant. You would not cash in your investments simply because they had gone down in value over the short term. Sometimes these changes might be long lasting and may not recover, even over the long term.
19 INVESTMENT ADVICE KEY DECISIONS TO MAKE 19 The scale below should help you establish where you currently stand and what you might be prepared to do. It covers your attitude to financial goals, how much risk you re willing to accept, how you feel about the ups and downs of investing and how much you can afford to lose. The scale opposite runs from A to E, with the lowest risk at the top and highest risk at the bottom. The Customer Risk Profiles below are not meant for direct comparison to The Risk Meter in your fund guide as it s important that you consider having a spread of investments and not limit yourself to one area. We think it s best to start by reading Profile A and then B and then C and so on, so that you re working out whether the next description is more like you than the last. Once you ve worked out where you are on the scale, you ll be ready to take the next step. INVESTMENT LOSS You can t afford to lose any of your money, as this would reduce your ability to do what you want or need to financially. FINANCIAL GOALS You re prepared to set your financial goals and change them based on getting interest on a bank or building society account. You hope that the interest you get will offset the effect of inflation. You can t afford to lose any of your money, as this would reduce your ability to meet your financial commitments. However, you can afford not to get any income from your investments. You re prepared to set and change your financial goals without taking into account any future income or growth because you re not relying on these factors. You can afford to lose some of your money, even though this would reduce your ability to do what you want or need to financially. If your profile is towards the middle or upper end of this category, you can afford to lose more of your money. You re prepared to set and change your financial goals in the knowledge that you may lose some of your money. You accept that the value of your investments at the end of the period you re investing for may not be what you hoped. So, you re prepared to wait longer than you expected to take your money out. You can afford to lose some of your money but you are not risking your ability to meet your essential financial commitments. If your profile is towards the middle or upper end of this category, you can afford to lose more of your money. You re prepared to set and change your financial goals in the knowledge that you may lose some of your money. You want to make financial plans based on receiving returns but you accept that you may have to change your plans if these are not achieved. You can afford to lose a large proportion of your investments before this would reduce your ability to meet some of your financial commitments. If your profile is towards the upper end of this category, you can afford to lose more of your money. You re prepared to set and change your financial goals in the knowledge that you may lose some of your money. You want to make financial plans based on achieving a high level of returns but you accept that you may have to change your plans if these are not achieved.
20 20 INVESTMENT ADVICE KEY DECISIONS TO MAKE 5. INVESTMENT TYPES. A range of investments to balance risk and reward. WHAT CAN I INVEST IN? Many people think of investing as buying shares in a company floated on the stock market. That s true, but company shares are actually only one of many different types of investment. It s important to understand the differences between the four main types of investment so you know what to expect when you invest in them. 1. COMPANY SHARES INVESTING When you buy shares in a company you partly own it, which means you receive a share of any profit. Returns are usually made when the company is profitable and occur in two ways: Regular payments to shareholders on set dates, known as dividends. Increased value from the rise in the market price of the company shares, which you benefit from when you sell the shares. RISKS For many reasons the company may not pay a dividend and the share price may fall. This means the value of your investments will go down and there is a possibility you could lose all your investment if the company goes bust. A company s fortunes can change quickly and frequently so investing directly into companies is risky. CASHING IN You can sell company shares at any time but you may only make money if they are valued at a higher price than when you bought them. 2. COMMERCIAL PROPERTY INVESTING Commercial property consists of office buildings, shops, factory premises or any other property built for business. When you invest in commercial property you buy a part share in one or more of these properties. Returns from commercial property can be made in two ways: Income from rent paid by the tenant. Growth from any rise in the property s value. RISKS Commercial property is governed by the rules of supply and demand. The demand for commercial property changes over time and from place to place. When demand is low, the value of property declines, rents may be frozen and tenants are more likely to leave. This could have an impact on the income you receive and the value of your investment. The value of the property is the valuer s opinion, which can change. CASHING IN Commercial property can take a long time to sell. This may mean there will be a delay when cashing in. In certain conditions you may not be able to get your money out at all or may have to accept a lower price for your investment.
21 INVESTMENT ADVICE KEY DECISIONS TO MAKE FIXED INTEREST SECURITIES INVESTING Fixed Interest Securities are also known as corporate bonds. These are effectively a loan to a company. In return, they pay you regular interest at an agreed rate, this becomes part of your investment return. Most bonds have a set date when the company pays back your loan and your investment ends. Bonds are a good way to achieve income. Large well-established companies are less likely to let you down, but tend to pay lower interest rates because they have a lot of investors. Bonds have credit ratings (from AAA+ to D) which tell you how likely it is that the company will be able to pay back your loan plus interest. Corporate bonds can be bought and sold. If the company is performing well, you may be able to sell your corporate bond at a profit. RISKS You can lose money if interest rates rise above the rate on the bond. If the company is not financially secure, it may not pay the interest it owes you and may not even be able to pay back the loan. CASHING IN Interest rates affect the value of bonds. If you sell a bond early, its price will depend on the current UK interest rate. GOVERNMENT BONDS Also known as gilts, government bonds work in the same way as corporate bonds except that instead of a company, you re lending your money to a government. Government bonds tend to be less risky than corporate bonds because, although not impossible, it is much less likely that a government will go bankrupt than a company. Generally offer lower interest rates compared to corporate bonds. 4. CASH INVESTING It may seem odd to consider cash as an investment, however, it can be a valuable investment in its own right. The safest type of investment secure, flexible and easy to move. Good base from which to invest in other investment. Offers very limited potential returns. RISKS The fund has money on deposit with companies such as banks or other financial institutions. If any of these suffer financial difficulty, they may be unable to pay back some or all of the interest, original amount invested or other payments they owe. If this happens the value of your fund may fall. For the value of your cash savings to keep up with inflation, you will rely on your savings rate of interest being greater than the rate of inflation. ALTERNATIVE INVESTMENT You can invest in almost anything that is bought and sold around the world. This includes: Commodities and metals such as gold. Natural resources such as gas. Man-made infrastructures such as roads and bridges. Crops such as sugar. Collectibles such as art. Derivatives, which are specialist investments that some funds can use. A derivative is a type of contract that the fund takes out with another company. For example, a contract could have the option to buy a particular investment type at a particular price in the future. Alternatively, it could enable the fund to benefit from the changes in value of a particular investment type over a period of time. Like other investments a derivative has its own market price. It derives this from changes in value of the investment type to which it s linked. Derivatives are traded in the investments markets. Instead of investing directly in an investment type, such as company shares, bonds or commercial property, the fund can invest indirectly in that investment through a derivative. The fund can also take out derivatives that allow it to get a particular foreign exchange rate or interest rate in the future. Derivatives may be more volatile than a direct investment in company shares, bonds or commercial property. Alternative investments tend to be highly specialised so you need a good understanding of the market. We don t offer direct investment into any of these alternative investment types, although some investment funds available to you may invest your money in them.
22 22 INVESTMENT ADVICE INVESTMENT PRODUCTS WHAT ARE INVESTMENT FUNDS? It s possible to invest directly on your own through a broker, although this can be risky unless you re very experienced. A more common choice is to put money into an investment fund managed by a provider, such as Legal & General. HOW FUNDS WORK Investment funds are a convenient way to invest in many different investment types. You buy a share of a fund along with lots of other investors, and with your combined buying power you can all invest where you would not have been able to alone. This is called a pooled investment fund. Funds always have an aim and a mandate. The mandate is a set of instructions that tell the fund manager what they can and cannot do in their efforts to achieve the fund s aim. This will include what type of investments to buy and how much of each to hold. As an investor in the fund you take your share in the rewards. This is determined by the fund s performance and how much you have individually invested. OVERSEAS FUNDS Overseas investments allow investors to take advantage of the growth potential of markets outside the UK. Currency changes can affect the value of overseas investments. For example, if the British Pound ( ) strengthens against the local currency in the market you re invested in, the value of your fund will fall. Conversely, if it weakens, the value will rise. FUND SPECIFIC RISKS In addition to general investment risk, individual investment funds have specific risks that apply depending on where and how they invest. GENERAL FUNDS General investment funds spread risk over many different types of investments, for example, they may invest in company shares, commercial property and fixed interest investments. General funds may also spread their investments across different industries, for example, financial services, mining, pharmaceuticals and transport. These investments may be held in one country or may span a number of different countries. SPECIALIST FUNDS Specialist funds invest in a particular industry, country or region. These funds invest in companies from a particular market sector, which means there is a higher level of risk. The value of your investment might fluctuate more often and by larger amounts than funds that are spread more widely, particularly in the short term. Specialist funds tend to aim for higher potential returns compared to mixed investments. Specialist funds are likely to be riskier than those holding a very wide spread of investments.
23 INVESTMENT ADVICE INVESTMENT PRODUCTS 23 A FUND CAN USE DERIVATIVES FOR DIFFERENT PURPOSES EFFICIENT PORTFOLIO MANAGEMENT This means the fund uses derivatives to help with efficient day-to-day management and to reduce some of the risks of the market. For example, this could include: managing the effect of changes in exchange rates or interest rates on the fund; investing indirectly in an investment type when it might not be possible to obtain the investment type directly; investing in an investment type at a lower cost than it would be to invest directly; managing cashflow when it may be difficult to buy or sell other investment types. ENHANCING INVESTMENT PERFORMANCE As well as efficient portfolio management, some funds can use derivatives to try to: enhance overall investment returns; manage the level of risk within the fund; help protect investment returns from market falls. This includes investing in derivatives whose value rises when the market falls, but whose value falls if the market rises. So in certain circumstances there may be a higher risk of loss by investing in a fund that uses derivatives to enhance performance. A fund s Key Investor Information Document (or KIID) tells you whether the fund uses derivatives to help with efficient day-to-day management or to help enhance performance.
24 24 ADVICE INVESTMENT GUIDEADVICE INVESTMENT PRODUCTS TYPES OF FUND MANAGEMENT Every fund is designed with a specific aim in mind, for example, to provide an income. Funds can be managed in two ways to achieve their aim, either actively or passively. ACTIVE Active management is when a fund manager chooses a fund to invest in, the stock selection, how much to invest and when. HOW ACTIVE MANAGEMENT WORKS It s the fund manager s job to use their experience, knowledge and in-depth research of the market to try and maximise performance as market conditions change. The fund manager will change the investment mix as time goes by according to the fund s aim, within its mandate. Although not always possible, the fund manager tries to continually improve the performance of the fund, doing more than simply avoiding failures. For example, if the aim of the fund is to generate income, the manager will be more likely to invest in companies that pay out higher dividends. ACTIVELY MANAGED FUND CHARACTERISTICS Can help make the most of the positive market conditions or limit the effects of poor market conditions. If the stock market is doing well, the fund manager may move more of the fund s money into company shares to take advantage of high company dividends. If share prices start to fall, perhaps because of a world event, they can move some of your money out of company shares and into bonds, commercial property and cash to try and shelter your investment from any stock market losses. If the fund manager makes a poor decision, the fund may perform worse than the market. Actively managed funds tend to have higher annual management charges than passively managed funds as you are paying for someone s expertise, research and knowledge of the markets. All importantly, past performance of a fund is not a guide to the future.
25 INVESTMENT ADVICE INVESTMENT PRODUCTS 25 PASSIVE Passive management aims to track the performance of a particular index as closely as possible, within the fund s aim and mandate. These type of passive funds are often called index-tracking investments. WHAT IS AN INDEX? In an investment context, an index is a measure of change in value or price. Investors can use an index to measure the performance of a stock market, an industry, a type of investment and more. Investment indices include the FTSE 100 Index, the Dow Jones Index, the Nikkei 225 and DAX. PASSIVELY MANAGED FUNDS CHARACTERISTICS If the index goes up, the fund s value should go up in line with the market. If the value of the index falls then so will the fund. Due to pricing systems and delays, tracking funds do not mirror the index precisely. Passive funds are unlikely to perform better than the index they re tracking but they re also unlikely to perform much worse. Index-tracking investments generally have lower charges than actively managed funds. HOW PASSIVE MANAGEMENT WORKS In a passive fund, the manager will buy all or some of the investments in an index with the aim of mirroring the overall performance of that index. The manager then adjusts the investment mix, within the fund mandate, to reflect changes in the overall index as time goes by. For example, the aim of an index-tracking fund that tracks the FTSE 100 Index is to reflect the overall performance of the top 100 companies on the London Stock Exchange in the UK. If a company drops out of the FTSE 100 Index and another enters, the fund manager may change the investment mix to reflect the change.