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November 16, 2012 6:12 pm
Imagine you are lucky enough to be the last mid-management banker in London to get a bonus, or just won the lottery, came by a lucky inheritance, or worse, got laid off: what should you do with the cash?
In this column, we will try to answer that by looking at how to invest specific sums.
This week, we’ve chosen £20,000 – it’s roughly the amount a couple would have as their annual individual savings account allowance. We asked three experts for suggestions on how to invest it.
Please note their suggestions are for general information only and do not constitute investment advice.
Low risk: Let funds do the heavy lifting
– Sheridan Admans, investment research manager, The Share Centre
Investing in funds takes the strain off the investor, especially for relatively small sums like this. The use of funds allows investors to diversify by asset, region or sector, but without having to do lots of individual company research.
For an investor in their mid-30s to 40s we would suggest a focus on capital growth, although income assets should not be overlooked, as over the long-term the reinvestment of income can produce some very large compound returns.
We’ve assumed the investor is fairly comfortable taking a medium to high degree of risk, and that the capital invested is to support future income requirement, such as retirement.
Our growth-oriented portfolio would include some exposure to international companies, providing a layer of diversification that a UK based portfolio may lack, and small to medium-sized companies, for growth potential that mature companies may lack.
We’re particularly interested in emerging markets for growth. These regions generally have growing populations, an abundance of raw materials, developing financial markets, a growing middle class and in some cases growing consumer demand.
Exposure to specialist sectors, such as technology, can bring great benefits if it’s timed correctly. Investment in information processing equipment and software as a share of GDP peaked between 1999 and 2001 and tailed off when the tech bubble burst. Ever since, investment in this area has shrunk as a share of GDP and since 2003 a significant gap from under-investment has grown, suggesting that at some point investment in IT will revert to trend.
Energy, and in particular fossil fuels, is another sector investors may wish to consider. As global populations expand and countries develop, demand will increase while cheap and easily extractable sources will deplete.
Equity funds from our select list that give exposure to these key themes include Henderson Technology, Invesco Perpetual Global Smaller Companies and Artemis Energy. Investors of this risk level may want to consider the following funds to form part of their portfolio. For commodity exposure, you could consider a precious metals exchange-traded commodity, while Insight Absolute Currency uses currency trading strategies to achieve positive returns in all market conditions.
Medium-risk: trusts offer instant diversity
– Lauren Charnley, stockbroker at Redmayne Bentley
As a private-client stock broker, we advise on stock selection all the time – but with a capital sum of this size we would recommend collective investments in order to spread risk and achieve appropriate diversification for a medium-risk investor.
We particularly like investment trusts, which are closed-ended funds whose shares trade on the stock market. They tend to have low charges, they can use accumulated reserves for dividend payments – many have long histories of increasing dividends – and it’s often possible to buy the shares at a discount to the value of the assets.
Among the UK-focused funds, a favourite is City of London Investment Trust, which aims to produce balanced returns through investing in equities. The trust has more than 100 holdings and so provides a good level of diversification across the FTSE 350. The majority of its top-ten stocks – companies like Shell, Diageo and Unilever – could be considered solid direct equity investments for individuals with a greater sum to invest.
Given the recent unexpected rise in domestic inflation, infrastructure exposure has the potential to act as a hedge against the possibility of rising prices. In this space, we like HICL Infrastructure Co, which specialises in infrastructure investments. It has a historic yield of more than five per cent and has a progressive – and index-linked – dividend policy. Great for income investors.
Securities Trust of Scotland could be a consideration with a view to ensuring exposure to overseas companies. The fund predominantly invests in European and North American equities whilst allowing some weighting for the emerging markets. It could work well in a portfolio with other funds offering alternative geographical exposure.
For more direct exposure to emerging markets, Templeton Emerging Markets would be our choice. However, with a yield of less than 1 per cent, this is an unadulterated growth play, with heavy exposure to Latin America and Asia.
As well as geographic diversification, investment trusts can also provide sector-specific exposure. Polar Capital Technology Trust is a way of getting exposure both to technology companies and the US market, where tech stocks are predominantly listed. More than 70 per cent of the fund is US focused and top ten holdings include household names such as Apple, Google and Microsoft.
High risk: Spread betting
– Dominic Picarda, associate editor, Investors Chronicle
Short-term trading should ever only be a small sideline within most people’s financial strategy. The leverage – i.e. use of borrowed money – involved in most trading products can quickly result in exaggerated gains, such that a 1 per cent price movement can become a return of 10 per cent on your stake – or much more. However, this cuts both ways, making it easy to rack up losses far greater than the amount you invested.
How much of any lump-sum payment received might be committed to a trading account will depend on your circumstances. Paying off loans and mortgages, putting aside money for future financial commitments and conventional investments ought usually to take precedence. Only funds left over after all of these things should really be used for leveraged trading. As many providers of contracts for difference and spread betting say in their marketing, only stake money you can afford to lose.
Even if you can easily afford to pay a significant amount into a trading account, it makes sense to start out small, staking no more than a couple of thousand pounds on one position. A good rule of thumb is to risk no more than 5 per cent of your overall trading “pot” at any one time.
Spread betting is an ideal way for entry-level traders to access the markets, as some providers will accept positions of just 50p a point. A spread bet worth 50p-a-point on the FTSE 100 based on an index price of 5800 would be equivalent to a £2900 investment in the index. Spread betting firms generally have excellent websites with bags of free data. And any profits you make on spread bets are tax-free.
If and when you find your feet as a trader, you can then contemplate committing further funds from your windfalls to your account. To improve your chance of getting to this stage, you need a disciplined approach. This means focusing on a few select markets, applying a systematic approach – including a contingency plan if things don’t go to plan – and not risking too much on any single trade. Even though you should only trade with money that you can comfortably afford to lose, this does not mean you should trade with abandon. There will be plenty of times when you’re sitting on your hands.
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