29 June 2010

Absolute Returns - for those interested in investment detail!

Many people with money to invest are really not interested in investing. If leaving your money in a savings account was at all viable over the long term then I think that many would go for that option. But the trouble is, as we know, (a) savings rates are poor, particularly at the moment (and over the long term they do little better than maintain their value against inflation), and (b) investments go up and down.

The big question is whether there is any middle ground. One possibility here is the growing range of "absolute return" funds. A good investment will tend to out-perform a market index such as the FTSE 100 - that's a "relative return". But out-performance may just mean it doesn't fall as far, but you still lose value which is not good if you were planning to spend that money shortly, or if your financial plan assumes a constant increase in value. Absolute return funds, on the other hand, aim to keep on going up, whatever the markets are doing.

Of course, that comes at a price, and when markets are rising you would not generally get such a big increase in value. And it is still an investment after all, so all the funds that I know of still have the possibility of falling in value - absolute return is an "aim" not a guarantee.

There are lots of different ways of achieving an absolute return, some more complicated than others. A recent survey (Citywire) identified 11 different strategies. The general rule of diversifying your investments would apply here, too, so using more than one absolute return fund with different strategies would make sense.

Other general rules of investing also still apply - funds should be selected with the investor's attitude to risk in mind, and with an eye on asset classes, too.

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