Four investments for risk avoiders

Do you always see your child to the school gate, even at the risk of being late for work? Do you always refuel the moment the petrol gauge drops under a quarter? Do you watch your cholesterol, even if it means passing up the offer of a fresh cream cake?

If you answer 'yes' to all these question, you are probably a risk avoider. But when it comes to money, does that consign you to stuffing your spare cash in a savings account paying less than 1%? You might think so. If going after high rewards means high risks, then you might well be resigned to receiving only low rewards by taking little, if any, risk in your financial life.

Welcome to the rainbow of risk
Well, that's not quite true. There is a rainbow of risk from the red hot end of spread betting, options and futures (which you would never touch) through medium risks like index-tracking share funds to the comfortingly safe lands of government bonds and most National Savings & Investment products.

But that does not mean that you must confine your investment choices solely to the safe end. You can pick the products you want along that continuum, and can indeed tailor your expected returns by picking a mixture that suits you.

But a word about risk, for those who worry (well, we all do sometimes). Just as in life, there are no absolute certainties in savings or investments and you are fooling yourself if you think that any home for your money is going to be 100% guaranteed. Even if that's the promise, it depends who's funding the guarantee (doing the underwriting, if you like).

- Remember Equitable Life? The mutually-owned insurer didn't have the money to fund its guaranteed annuities. The promise turned out to be undeliverable without robbing other policyholders.

- Remember Northern Rock? We know now that banks aren't as safe as we once thought. A government fund, the Financial Services Guarantee Scheme, guarantees the first £85,000 of your deposits with a given institution, even if this is split between several accounts. If you savings exceed this, it is best to split your savings between banks.

- Government bonds are guaranteed by the Treasury. That means you should get your money back. However, it depends which government. There is a good chance now that Greece won't be able to repay all its loans, or at least it won't do so on time. If so it joins a list of defaulters that include pre-revolutionary Cuba, China and Russia, plus Argentina and Brazil in the 1980s.

- But getting you cash back doesn't mean that cash is worth what you expect. Germany in 1920, Hungary in 1946 and Zimbabwe between 2002-2008 had hyperinflations so bad that your savings could halve in value during the time you queued to reach the bank clerk. But even moderate inflation can seriously damage the value of your investments. Ten years of 7% inflation will halve the spending power of any sum.

Products for risk avoiders
Here are four products that may appeal, a brief description, and the main advantages and disadvantages of each.

Index-linked savings certificates
National Savings & Investments' index-linked savings certificates have just started to be offered again. They are five-year issues that pay 0.5% interest and have an inflation protection built in at the rate of the Retail Prices Index. They are particularly attractive to high tax payers because returns are tax free.
Advantages: Good when inflation is high, and very safe.
Disadvantages: Only modest returns during low inflation

Gilt-edged stock (Gilts)
The ultimate safe investment, gilts typically pay around 3-4% a year and can be bought through a stockbroker. You need to make sure you buy the best type to suit your tax needs, and that will depend on whether you want most of the return in the form of capital or in the form of income.
Advantages: Very safe, solid return.
Disadvantages: Potential income returns vary with interest rates, and can be poor when gilts are in demand. Prices can change too, either giving you're a profit or loss on your capital.

High income share funds
Individual shares have risks, and companies that pay good dividends may fail to do so when they encounter hard times. However, funds that specialise in high income spread their money over hundreds of different income-paying companies or bonds and provide a more predictable income. Some of the best have produced returns much better than the stock market as a whole.
Advantages: Good incomes, relatively safe.
Disadvantages: Prices of funds can fall. Watch out for some funds with high fees, which can eat up too much of your returns.

Permanent income bearing shares (PIBs) and subordinated loans
These are high yield bonds issued by building societies and banks and traded on the stock market. They generally pay between 6% and 9% a year.
Advantages: Good yield compared to a bank account; most are safe.
Disadvantages: Hard to trade, with a big spread between buy and sell prices. One or two issues from troubled building societies, including several in Ireland, have not been repaid in full. A little research is definitely worthwhile.

Related links:
Beginner's guide to investing in funds
Beginner's guide to investing in stocks and shares ISAs