QUICK GUIDE TO YOUR CHOICE OF INVESTMENT

The following opportunities have the potential to make you seriously richer, but there is always the risk of substantial losses. The key issues of spreading risk and your need for liquidity must be understood at the outset.

1.    STOCKS AND SHARES
   

For long periods during the second half of the twentieth century it was difficult not to achieve worthwhile gains on the stock-market of your choice. Shares proved to be the most profitable investment opportunity. The early years of this century delivered widespread losses, and expectations are now much lower. Furthermore, a major terrorist attack or a worldwide epidemic could damage share prices worldwide and recovery would take time, so stock-market investment should not be rejected but a healthy dose of realism is required.

Your choice of where to invest is of the essence. When stock-markets are under-performing, consider investing for dividends rather than concentrating on capital growth. Collective income funds have performed much better than capital growth vehicles under these difficult conditions.

Sensible investment decisions require you to evaluate the:

1.    Countries
   

2.    Sectors
   

3.    Companies
   

When Europe and the USA stock markets are declining, it is entirely possible that, say, Hungary or Thailand are enjoying a bull market. In these smaller markets, you may find an opportunity to invest in a fund concentrating only in a particular country. Once you have invested, however, monitor the share index for that country as the share price of your own investment in order to get an early warning of a falling market.

Within major stock-markets, sector considerations are important. When the economic outlook is uncertain, defensive sectors could outperform the overall market. Public utility services, tobacco and defence shares may fall into this category. So look out for articles and websites commenting on defensive sectors. In larger stock-markets, collective investments focus on various different sectors so it may be possible to invest in your chosen sector without having to pick individual companies.

If you decide to invest in individual companies, do your homework first. Is there an unbroken record of consistent growth in sales and profits? Or has it been a roller-coaster ride for investors? Evaluate what the risk factors are, if the share price is bolstered by the hope of successful clinical trials of a major drug or commercial exploit of new technology, recognized that failure or even significant delay could cause a sudden price plunge.

Some investors suffered damaging losses by investing in high yielding corporate bonds, commonly known was junk bonds. The exceptional returns promised by some collective bond funds, which invested in companies such as Enron and World Com, should have been recognized as involving exceptionally high risk. It is a myth that bonds are generally safer than equities. Investment grade corporate bonds have delivered worthwhile returns, as have government bonds such as Us Treasury or UK Gilts, in difficult market conditions. The fundamental point is underlying quality rather than the promise of spectacular returns.

TECHNIQUES TO USE
Using Stop-Loss Limits
Using stop-loss limits is a way to limit your losses. Whenever you buy shares in a company, a unit trust or other collective investment, set a stop-loss limit, say 10% or 15% below the purchase price. When the price increases move your stop-loss limit up accordingly, so you are ‘protecting your paper gains’. The technique requires that when the price falls to your stop-loss limit, you sell and do not procrastinate. This requires more self-discipline than most people have, but if you follow it religiously your losses will be limited.

Investors have a tendency to watch prices go down, convincing themselves that the share will bounce back. It may well do-eventually; but you need to recognize that the price of many shares and collective investments will fluctuate over a wide range in any twelve month period. The stop-loss technique is arbitrary, and is designed purely to limit your losses. It is entirely contrary to the approach of Warren Buffet, the legendary investor, whose approach has been to buy a share and hold it though thick and thin for the long-term.

Lock in Gains
Locking in your gains is another arbitrary technique. Some people sell one half of their holding each time the price increases by 50%. It is another approach designed to ensure you avoid watching the share rise and then continue watching your gains disappear before selling.

Lack of Liquidity in Smaller Company Shares
Smaller company shares are popular with investors, because there is always the possibility of investing in the next ‘Microsoft’ type success story. You need to recognize, however, that the percentage difference between the buy and sell prices of smaller company shares may be more than 10%, and worse still there could be times when the only way one can sell the shares is on a ‘matched bargain’ basis, which means the broker has to find a purchaser willing to buy your shares.

Be Wary of shares tips
Newspapers, investment magazines, tip sheets and the internet offer you plenty of tips. You need to realize, however, that by the time you attempt to buy the shares some people will have already invested and brokers will have marketed up the price so that some of the potential gain has already been lost to you.

Avoid share scams
Never ever buy shares as a result of an unsolicited phone call given you a hot tip which is about to take off. Over the years, I have received countless phone calls from New York and further afield locations. If you receive a call, just put the phone down. There have been many cases where the company does not exist or is a hopeless investment.

1.    RESIDENTIAL AND COMMERCIAL PROPERTY
   

Poor stock-market performance in recent years has fuelled a boom in buy to let residential property investment. As with many other booms, naïve investors rush in and scams abound. Some people have lost money by responding to advert offering a complete service of raising finance, buying properties and finding tenants. A typical claim has been the opportunity to acquire a million plus portfolio by investing less than $100,000. The reality has turned out to be expensive finance, miserable properties and lack of tenants.

It is folly to imagine that, buy-to-let residential property investment is a get rich quick opportunity. It may be in a booming property market, provided that you sell before a sharp fall or collapse. If you believe that residential property investment is for you, it is best to regard it as at least a 10 years investment so that you have a good chance of making a decent capital gain.

A key to success is the choice of proper and location, locations is of the essence. Some people read that a particular town or city is a hotspot and plunge in. first-hand, or better still, an intimate knowledge of the local area is essential. An area of high employment, good transport links and relevant local amenities are important considerations.

Many investors understandably choose to invest in flats rather than houses, to avoid unwanted complications with overgrown and unsightly gardens. A new flat may seem attractive, but you have to be satisfied that the price will support a viable rent for you. Your aim should be that your rental income will cover your mortgage or loan repayments and the cost of maintaining the property.

Local letting agents are a valuable source of knowledge which will allow you to judge the likely rent of a property before you decide to buy it. Before letting, ensure the property is spic and span. If some refurbishment is necessary, choose robust and low cost fittings, hardwearing but inexpensive floor covering sand a neutral colour scheme.

Commercial property investment has performed well in rent years, but it must be recognized that an economic slump could make a property temporarily unsalable and the tenant could go bust.

Generally speaking, the stakes are higher for commercial property than residential investment. The ability to borrow against the property is lower, often a maximum of 70%, and because unit prices are higher there is less opportunity to spread the risk over several properties.

The quality of the tenant is essential. A multinational offers much more security than a private company. Edge of town redevelopment schemes, new road systems and the introduction of congestion charges to reduce traffic levels could adversely affect your investment. So it should be approached with caution by do-it-yourself investors, and investing in a collective investment scheme will deliver a greater spread of risk and much better liquidity when you wish to realize your investment

Precious Metals
Gold is regarded as a safe haven investment in uncertain rimes. From the September 11, 2001 attacks to the time of writing, gold has risen by about 40%. It has to be said, however, that price movements in gold are often fickle and can be affected by hedge funds buying or selling in anticipation of dollar value movements, because gold is valued in US dollar terms. If you decide to invest in gold, buy ingots because jewelry is an indulgence not an investment.

1.    Fine Wines
   

With knowing repetition, quality is vitally important. The best returns have been achieved by top notch old world wines. Buying wines en primeur is something of a gamble, however, even though it helps to maximize the potential return. En primeur means buying wine whilst it is still in the barrel, and the vintage may not be as highly rated as expected. Also, you need to think in terms of holding the wine for about five years so it is medium-term investment. Economic slump in a major wine buying market may mean that prices fall sharply. An acquaintance of mine has a pragmatic view to investing in wine, he only buys wine that he can afford to realize by drinking it if necessary.

1.    Miscellaneous Investment
   

Various possibilities exist from memorabilia to personalized car number plates. It is claimed that car number plates have doubled in value over the past 10 years.

Any such items should be regarded as medium to long-term opportunities, which may prove difficult to sell at an attractive price if you need to realize your investment quite quickly.