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.
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.
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 of small stakes together and companies start to notice you, especially if you have a media-attractive project, such as protesting 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.
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.
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
