I was playing around on the “Set your investment goal” page, and estimated that the tool assumed the following annual rate of returns for each risk level:
- 3.8% for risk level 1
- 4.3% for risk level 2
- 5.3% for risk level 3
- 6.2% for risk level 4
- 6.7% for risk level 5
May I ask what’s the reason behind those choices?
I can’t help to notice that here’s only one fund in the risk level 1 category, and that fund has an annualized rate of return of 1.53% since inception on 17/Apr/2009, far below the tools’ estimation for risk level 1.
Also, I don’t think it is appropriate to give an estimated investment scale of less than 5 years, it is against the industry-wide recommendations and best practices. £10,000 invested in a risk level 5 fund indeed have a chance to reach £10,670 in one year, but that chance is often worse than tossing a coin. For your reference, a British investor (i.e.: in GBP) invested in emerging market equities between 1970 and 2019 inclusive would have made a loss in 24 out of 49 years, and made a less than 6.7% gain in 3 other years, only in 22 out of 49 years would the investor made a gain greater than or equals to 6.7%.