INCOME VERSUS GROWTH: Look down the road and go the distance

First think emergency fund then plan long term, says Tony Lyons. And don't touch your investments
Once you have enough money saved in the bank or building society to make a decent emergency fund (see page 8, saving in your twenties and thirties) then you should start to consider how to build up a range of investments for the long term. The goal here is growth, as you should plan to leave your portfolio as untouched as possible.

Don't rule out stock market investment just because you know nothing about shares. If you are planning to leave your money untouched for many years, you should not think too hard about the short-term volatility of the markets. Over the long term - five years or more - equity investment has usually outstripped all other conventional savings. But in a low-inflation, low-economic growth environment, things may not move so quickly.

If you are well off and do not want to take an interest in your investments, there are plenty of people who would be pleased to construct a portfolio of investments to suit you (and then charge you to manage it). All you need is a lump sum of at least pounds 10,000.

"We match our service to the client's individual needs," says Simon Wombwell of Newton, just one of the companies offering this type of portfolio management. "It suits those people who want to leave the investment decisions to a professional manager. A balanced portfolio, for example, will invest in bonds and equities internationally, depending on the manager's views of markets and econ-omies." Newton makes a 4 per cent initial charge, with an annual 1.25 per cent annual fee, for this service.

Fidelity Portfolio, available through independent financial advisers and direct from Fidelity, charges normal unit trust management fees and offers international growth. Richard Wastcoat of Fidelity says: "Its investment is put into a gamut of funds, with asset allocation decided by an investment committee."

While these managed services have their attractions, many investors get hooked on buying and selling shares and many of those who don't take an interest in the market prefer to be advised by an IFA or certified financial planner.

"I wonder just how bespoke some of these services really are. They are usually based on model portfolios and if they use a fund of fund approach, performance could be dissipated," cautions IFA Graham Bates of Bates Investment Services.

Very risk-averse investors could consider moving out from the bank or building society through a with-profits or distribution bond. These are offered mainly by the larger insurance companies. They both have a broad range of assets in their portfolios, including shares (equities), bonds, other fixed interest and sometimes property. A with-profits bond grows through an annual bonus. This is declared annually by the company's actuary and is usually guaranteed. If you want a regular income, a distribution bond is invested in the same with-profits fund.

"The Prudential with-profits bond has a 6 per cent yield and has shown itself one of the top performers," says Kim North of IFA Pretty Financial.

"And the Sun Life distribution bond is a very big fund with a good track record."

But these sort of investments pay lots of commission to IFAs and life company sales people. You can do some extra research (Chartwell has a useful guide) and then buy the bond through a discount house, or go to a fee-based IFA.

"If you are a lump-sum investor or a regular saver and don't mind a higher risk," says Ailsa Craig of RAD Brown, "then spread your money around. Look at a mix of equity and bond funds. Look to groups such as Newton, Gartmore, Fidelity, and Save & Prosper, with good track records. If you are prepared to take a higher risk, move from just UK investments and think about European and, maybe, US funds. Far Eastern and emerging market funds are only for someone prepared to take a very long term view and doesn't mind the high risks involved."

The younger you are, the more risks you can take. As you near retirement, you should make sure you move to lower risk funds, so that you can consolidate your nest egg rather than have it fluctuate too much with the ups and downs of the stock market. "But always make sure your money works hard for you" advises Mr Bates. "While even the best funds can go through sticky patches, if they underperform for any length of time, get shot of them."

And what if you don't have much money to invest or want to keep things simple? A tracker fund is a useful first-time PEP or ISA buy. These funds buy shares in a given stock market index, preferably the FT-SE All-Share. This means funds such as those offered by Legal & General and Virgin invest in around 830 of the UK largest companies, so are diversified. They aim to mirror the performance of the index, less their charges. Even better, these passively managed trackers outperform most actively managed funds.

However, trackers are not risk free. "You could be better off in a balanced equity and bond fund," says Mr Bates. "Active fund managers are there to reduce the risks as well as beat their given benchmark."

n Contacts: Chartwell, with-profits bond guide, 01225 321700; Legal & General, 0500 116622; Newton Fund Managers, 0171-332 9000; Fidelity, 01737 836735; Gartmore, 0171-782 2000; Save & Prosper, 0800 829100; Virgin Direct, 0345 900 900.