Investing for Dummies – UK - Levene Tony

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The whole point of cash investing is to use it when you’re uncertain or everything in your life looks awful. It’s a security blanket you can retire to during periods when all else is confusion or contraction.

      Don’t disrespect this fact. Keeping a firm hold on what you have isn’t just for fast-falling markets. It’s a vital concept in the months ahead of retirement or any other time when you know you’ll want cash and not risks. You lock in the gains made in the past and can go ahead and plan that big trip, your child’s wedding or the boat you want to buy. Cash is what you can spend, and expenditure is the endgame of investment.

       Property is usually a solid foundation

      The property you live in is probably your biggest financial project – assuming that you don’t rent it from someone. Typical three-bedroom semis now change hands at £500,000 or more in many parts of the UK. And at the higher end of the market, no one blinks an eye any more at £2 million homes (not that most of us can afford one).

      But is property an investment? Yes, because you have to plan the money to pay for its purchase, buying can help you spend less than renting and because you can make or lose a lot of money in property.

      Property beyond your home can also be a worthwhile investment. Stock market managers run big funds like property because it rarely loses value over longer periods, often gains more than inflation and provides a rental income as well. Commercial property, such as office blocks, shopping centres, business parks, hotels and factories, is usually rented out on terms ensuring not only that the rent comes in each month (unless the tenant actually goes bust) but also that the rent goes up (and never down) after each five years, when the amount is renegotiated.

      

Bricks and mortar are as solid an investment as you can find outside of cash, as long as the bricks and mortar are real. A fair number of property schemes take money from you for buildings that only exist on the architect’s plan. This is known as off-plan purchasing. In many cases, these buildings eventually go up, although you may sometimes struggle to find a mortgage lender or a tenant – or both. Some don’t, however, and these cases leave you nursing a loss as the developers and their agents gallop off into the sunset with your cash. This bad buy-to-let industry reputation puts off many mortgage lenders even where the building is finished to specification. Additionally, problems with loans can make tenants wary – they know they can be evicted if landlords don’t have satisfactory financial arrangements.

      Besides building up value in your own home, you have three main routes to investing in property:

      ✔ Buy to let. You become a landlord by purchasing a property that you rent to others.

      ✔ Buy into a property fund run by a professional fund manager. You can do so through personal pension plans, some insurance-backed savings plans and a handful of specialist unit trusts. These nearly always invest in commercial property although some now specialise in student accommodation.

      ✔ Buy shares in property companies. This is the riskiest method but the only one that can provide above-average gains.

      

Every week I get emails offering me ‘guaranteed returns’ from property or forests or farmland in some distant country. In many cases, the returns are promised over ten years and are truly enormous. I always delete these as trash. A ‘guarantee’ is only worth as much as the organisation backing it. And I don’t reckon too much on the chances of an offshore company being around in a few years’ time, let alone paying me what it promised.

       Bonds are others’ borrowings

      A stock-market-quoted bond is basically an IOU issued by governments or companies. Loads of other sorts of bonds exist, including Premium Bonds, which give you the chance to win £1 million each month at no risk, other than losing out on interest. But here we’re talking bonds from governments and big companies, which go up and down on stock exchanges.

      Bond issuers promise to pay a fixed income on stated dates and to repay the amount on the bond certificate in full on a fixed day in the future. In other words, you pay the government, say, £100, and the Treasury promises to give you £5 a year for the next five years and your £100 back in five years’ time.

      Sounds simple, right? Well, it’s not at all. Bonds are complex creatures with many traps for the unwary. (I devote a big slice of this book to the ups and downs of bond investment.) But if you reckon price rises will be kept to a minimum and interest rates will stay where they are or go down, then bonds are a good bet if you need regular income.

Diversifying is no monkey business!

      Diversify across asset classes such as property, bonds and equities – that’s the standard advice given to long-term investors. The theory is that when one asset is down, another goes up. So in the early 2000s, shares disappointed while property prices, both residential and commercial, soared skywards. Bonds and commodities, such as wheat and copper, also did well. But every once in a long while, investment theories break down. In the great 2008 financial crisis, virtually everything went down.

      Will that happen again? I don’t know. Nor does anyone else. But a London-based firm of financial experts called – and I’m not joking – No Monkey Business says that we should dump the diversification model. Its basic line is that all you need is a mix of shares to provide higher risk and higher reward, and index-linked government stocks to give total stability. I go into this further in Chapter 18. (The firm has now changed its name to something more mainstream – Fowler Drew – but not its way of working.)

      Bonds are becoming more common as well. The reason is partly because many investors have been taken with the relative safety and steadiness of bonds compared with shares and the relatively higher income they offer compared with cash. (Everything in investing is relative to something else, by the way.) But the reason is also because the people running big pension funds need the security and regular payments so they can afford to write cheques each month to the retired people who depend on them.

      

The easiest way to buy into bonds is through one of the hundred or so specialist unit trusts. But don’t take the headline income rate they quote as set in stone. It can go up or down, and no guarantees or promises exist. Some even cheat by hiding costs away. Always remember that the capital you originally invest in the bond fund isn’t safe either. It can go down or up along with investment trends and the skills of the manager.

Get your share of shares

      Shares make up the biggest part of most investment portfolios. They can grow faster than rival investment types and produce more. They’re probably your best chance of turning a little into a lot – even if the first ten years of this century was a shares disaster, it’s got better into the second decade.

       Shares are what they say they are – a small part of a bigger picture. Buying shares (also known as equities) gives you partial ownership of a company. You can own as little as one share, and if that’s the case and the company has issued 1 million shares, you have a 1-millionth stake in that enterprise.

      You can’t chip off that 1-millionth portion and walk away with it. What you get is 1-millionth of the profits and a 1-millionth say in the future of the company. But you won’t have a 1-millionth share of clearing up the mess if the firm goes bust. You can never lose more than you put in.

      Ownership rights are becoming more important and more valued. Put a lot

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