Investing for Dummies – UK - Levene Tony

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against excessive pay for fat-cat executives who fail to deliver to shareholders and collect big bucks if they’re sacked.

      Most people buy shares because they hope they’ll produce more over the long term than will cash, property or bonds. They’ve generally done just this, although no guarantees exist. Shares are your best chance for capital gains and the top choice if you want a portfolio to produce a rising income. But take heed: they can also be an easy way to lose your money.

      

Want to know the most dangerous sentence in investment? ‘It’ll be different this time.’ Sometimes, that becomes ‘the new paradigm’. What people mean is that they’ve found a magic formula to find an investment that goes up but not down. People trot out that sentence whenever prices rise rapidly, and brighter investors start to question how long it can continue. The thing is, the situation never is different. Anything that people promise is a one-way bet is bound to run out of steam sometime, whether you’re looking at property prices, the price of wheat or shares in African economies. Share prices, and the values of every other single investment in this book, go up with greed and down with fear. As long as these human emotions exist, ‘It’ll be different this time’ will be the same nonsense as the last occasion someone said it. Expect to hear this phrase many times during your investment life!

       Alternatives are a hodgepodge to consider

      This investment area covers a rag-bag of bits and pieces. For some people, alternative investments concentrate on items you can physically hold, such as gold bullion, works of art, fine wines, vintage cars, antiques and stamp collections. But for an increasing number of people, the term means hedge funds, which are about as esoteric as investment gets. Put simply, you hand over your money to managers who, by hook or by crook, hope to increase it.

      In most cases, don’t even ask how those types of managers hope to gain cash for you. They won’t tell you. Or they won’t be informative, instead just coming up with some meaningless jargon phrase. And don’t even ask what’ll happen if they fail. They don’t like to talk about this possibility, even though you could easily lose all the money you have with them.

      So is there a plus side? Yes. Hedge funds can make money out of shares when prices are falling all over the place. Once they were the only way to do this, but now ‘absolute return’ funds claim the same.

      In the section ‘Surprise! You’ve Probably Been Investing Already’, I explain in detail that, well, you’ve probably been investing already – without knowing about it. On that same line of thinking, you may also unknowingly have some of your wealth riding on hedge funds. Hedge funds make their main pitch to really big investment and pension funds, as well as to private investors with lots of spare money. Chances are that a hedge fund or hedge fund type of tactic is in your pension plan.

      

You can’t invest directly in a hedge fund unless you’re seriously, seriously rich. Some funds work on an invitation-only basis, so you wait until you’re asked! But you can sometimes put your money into a fund of hedge funds. This is a special vehicle that buys, holds and sells hedge funds. They’re sometimes offered to the general public – or at least those with the minimum £10,000 they usually require.

      Commodities consist of a totally different category. On the one hand they are the essentials of life – anything from coal to cocoa or copper – so they are hardly alternatives. But investors see them as an alternative to stocks and shares, property and cash because you can bet on the price of any quoted raw material, from potatoes to potassium, and from olives to oil. This facility attracts many professional investors, and therefore attracts money.

      You can make a fortune quickly in these commodities markets, but just as easily lose your shirt. No one can foretell who the winners and losers will be, or when or how or where. That’s the fascination of investment. It’s always changing but it always relies on the same basics of greed versus fear and supply versus demand.

Chapter 2

      Checking Your Personal Life Before You Invest

       In This Chapter

      ▶ Calculating how much you have

      ▶ Drawing up a family budget

      ▶ Taking care of life and limb

      ▶ Paying into a pension investment

      ▶ Checking the roof over your head

       Investment truth #1: Losing money is easier than making it.

       Investment truth #2: More domestic break-ups and rows are caused by money, or rather the lack of it (or the spending habits of one partner), than anything else. Money is more important than love, any day.

       Investment truth #3: You’ll be a better investor if you’ve secured your home base – getting a roof over your head whose costs are sustainable is the vital first move. Buying, if you can, is usually better than renting, so a mortgage is the number one investment. Provided, that is, that you can find the deposit.

       Investment truth #4: Paper profits have no more value than the piece of paper they’re written on. What your investments are worth on a statement is just a row of figures. Until you turn that investment into cash by selling, it won’t put a roof over your head, put food on your table or provide an income if something happens to the breadwinner.

       Investment truth #5: Borrowing money to buy investments can be a very fast route to the bankruptcy court, as can gambling on stock markets.

      Feeling down after reading that? Wondering why Chapter 2 doesn’t launch straight into how to analyse stock futures and double your money in minutes? Or how to clean up with a simple, can’t-fail formula?

      You’ve every right to be depressed and puzzled. But it’s a good thing you are. Investment knowledge has as much to do with when not to do something, when to hold on to what you have, and when to hold back and let the next person pick up the problem as it has to do with plunging headfirst into financial markets.

      And that’s what this chapter is about. Before you invest, you need to consider all the above truths. You need to take a close look at yourself, and those around you. You should be aware that no easy routes exist in finance. But more importantly, everything revolves around you and your family – not the commission needs of assorted advisers and hucksters who claim to have the solution to all your problems.

There’s nothing new under the sun

      I’ve probably been involved in investment writing for far too long. I’ve seen it all and then all over again. I can remember the great 1970s bust and boom, the 1980s boom and bust, and the 1990s boom that, inconveniently for my neat decades, only bust just after the decade ended in 2000. Then, back in 2008, we saw the great banks’ boom and bust. Add to that more than a few property bubbles, and some crazy ups and downs in gold, oil, wheat, sugar and just about everything else under the sun. Every time share or other financial market prices advance to new highs, I ask myself just how long it can last.

      Unfortunately, those running our finances never see it that way. They learnt nothing from the great 2008 banking crisis (or any other). This isn’t surprising: they can’t own to up the fact that finance runs in cycles of up and down because that’s more than their very highly paid job is worth. Asking them, ‘Just how do you do it? Where does the money come from and go to?’ is like asking the emperor about his new clothes. ‘Don’t worry. Nothing will go wrong,’ they reply. After all, these people

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