Lower risk investing

Investing your money always involves an element of risk but investors have a wide variety of both higher risk and lower risk investments to choose from.

At times of economic or market uncertainty ‘defensive’ stocks typically increase in popularity.

Defensives offer investors some protection against falling markets because they do not fall as far or as fast as other stocks. Ideally, they wouldn’t fall at all – or, at best, they increase in value as investors seek solace from market volatility and switch from speculative to defensive businesses.

Usually they have been found in sectors and industries such as utilities, consumer goods, pharmaceuticals and tobacco. What they have in common are relatively stable revenue streams, with demand for their products and services largely unaffected by the state of the wider economy.

For this reason, they are sometimes also known as ‘non-cyclical’ stocks and it is important to remember that while they are spared the full impact of a market correction they will generally not experience a significant upswing in demand when the economy recovers.

As well as defensive stocks, certain asset classes like bonds and gold are also seen as being safe places to ride out periods of market volatility.

Two different types of fund will make use of these safe haven investments to generate returns for investors with the aim of also protecting against loss.

Absolute return funds come in several different guises, but their aim is the same: to deliver a positive (‘absolute’) return in all market conditions. Some use a blended portfolio of bonds to achieve it, some will invest in the stock market, while others will use a range of different assets. Almost all will go ‘short’ on individual securities – i.e. they will use financial instruments to profit from the fall in the price of an asset – as well as investing in the normal way.

Examples of absolute return funds