Asset juggling spiced with adventure

In the last of a series on investment for the beginner, Anthony Bailey looks at prudent portfolios; 'Sixty per cent of the value of the stock market was traded in 1994. That's very good for stockbrokers. They get great commission'

WITH just a few thousand pounds, you could earn 6 per cent from a better-paying building society account, perhaps a little more. But be a bit adven- turous, and you could do better.

Once basic-rate tax is deducted, the 6 per cent rate falls to 4.5 per cent. And it slips further for higher-rate taxpayers, to just 3.6 per cent. Such a rate will just about maintain the real value of the money, provided no interest is withdrawn and assuming that inflation does not rise significantly.

But compare that with what some of the new-style corporate bond PEPs can offer: 7 to 8 per cent tax-free - a doubling of the return for higher- rate taxpayers.

Of course, the higher return does not come without an added risk. The value of your capital can fluctuate in most Corporate Bond PEPs. You could lose money.

A basic rule of investment is that you have to take a risk to get a better return. The successful investor will manage that risk by building up a balanced portfolio of investments, diversifying into a range of assets.

Last week's feature gave a snapshot of the three main classes of asset normally used:

q Low-risk deposits.

q Medium-risk, fixed-interest securities such as government-backed gilts and corporate bonds issued by companies.

q Higher-risk shares and unit and investment trusts based on shares.

So how should you divide your investment cake?

Murray Noble, a firm of fee-based investment advisers, notes: "The main thing to understand is that risk and return are measurable". The measurement that Robert Noble-Warren cites is standard deviation - that is, the fluctuation in an investment's value.

Such measurements for different unit trusts, for example, can be found in the monthly magazine Money Management. You need to know which investment offers the best value for money. For example, if you are likely to end up with 6 per cent from a deposit account and 6 per cent from something whose value is likely to fluctuate, the deposit account clearly offers the best value for money.

The result of such analysis produces a typical portfolio that might seem a little unusual, at least with regard to the UK. It consists of 30 per cent on deposit; 50 per cent in fixed-interest securities, including UK securities denominated in sterling and international securities; and 20 per cent in emerging markets - the volatile stock markets of certain countries in such places as South America and the Far East.

"This sort of portfolio is more efficient than one that is 70 per cent invested in UK shares. We might adjust the balance every two years or so. But you don't want to trade all the time," says Mr Noble-Warren.

"Sixty per cent of the value of the UK stock market was traded in 1994. That's very good for stockbrokers. They get great commission."

At Murray Noble the approach is one of buying to hold. And Mr Noble-Warren reckons an investor with as little pounds 10,000 could consider having his type of diversified portfolio.

In comparison Michael Mann, at Greig Middleton Financial Services, says: "The first point is that if you want to build up a portfolio of direct shareholdings you probably need at least pounds 50,000. Each shareholding should be at least pounds 3,000 to pounds 5,000, and a sensible portfolio would have at least 10 stocks."

But people with less cash can still build up a portfolio using unit trusts, PEPs and other investments. You need to divide your money according to how long you are prepared to tie it up - for the short, medium or long term. Long-term means at least five years and preferably seven to ten years. Establish a clear risk profile for each investment.

With pounds 50,000 to invest, up to pounds 10,000 might go into building societies, and probably several societies that might benefit from windfalls if they convert into banks. Some National Savings products may also be suitable.

After that, around pounds 25,000 could go into medium-risk investments, with pounds 15,000 into the longer-term, higher-risk category.

Certain investment and distribution bonds from life insurance companies could be suitable for medium-risk money. Higher-risk money can go into a range of share-based unit trusts - spread across the UK, mainland Europe, the US and the Far East.

"The precise distribution depends very much on individual circumstances, but it's important to keep investments under control and suited to personal circumstances, which can change,'' says Mr Mann.

Precisely how you spread and maintain the balance will depend on several factors; including:

q Your investment aims - wheth- er you want to draw an income from your investments or leave them alone to grow in value;

q Your tax position - you need to account for potential risks.