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Replanting a cash crop

I have built up considerable amounts of cash while waiting for markets to improve. I know I should move out of cash but where can I get a real return while markets are unpredictable?

The main purpose of investment planning is to create financial independence. This is when you own the properties in which you live and have guaranteed income after tax that is greater than your budgeted expenditure.

It is important that your assets are invested in a tax-efficient manner in order to create spare income or capital in case anything happens to you in the short term and to ensure you live comfortably in retirement.

Tolerance to risk varies according to the period of the investment and how speculative the investor wants to be. It is normally sensible to utilise low or no-risk investments such as cash over short time periods.

Over the last three years, there has been a global decline in equity values which, together with the impact of the war in Iraq, has resulted in increased funds held in the money markets. Now may be the time to take a more predatory look at other investments to seek out opportunities that suit your risk outlook and financial needs.

To achieve long-term real returns, it is necessary to invest in asset-backed investments.

There are four main classes of investments – cash, bonds, equities and property – and there are various investment products that are a combination of the main asset classes. When adding to your portfolio, as well as purchasing the right assets, it is also important to maximise the tax-efficiency and security of your investments.

To minimise capital volatility, you could consider a bond fund that invests in bonds of shorter maturities. If you are looking for total return, you should choose funds that invest in longer-dated issues as you can get more return. This means your capital is more at risk.

At the start of the 1990s, 75 per cent of business finance in the UK was carried out in the form of share issues and 25 per cent through corporate bonds. Today, more than 75 per cent of businesses are funded through corporate bonds and 25 per cent through share issues. Some companies are issuing corporate bonds in order to buy back outstanding shares so as to increase shareholder value.

Be aware that dividend yield from equities is now in line with the yield of Government bonds for the first time in around 30 years. Now is the time for the valuations of equities to be reconsidered. Stock selectors are able to buy quality company stock which yields more than gilts. Looking forward, it is important to choose good quality fund managers that can use thematic analysis in order to achieve investment returns.

Property is growing in importance as a main asset class to the extent that commercial property is expected to be among the best performers of the major asset classes in 2003. This is partly due to the fact that it can retain its value, generates income from rents, has a low correlation with other assets and is fairly predictable.

I recommend that a balanced portfolio is constructed from the main asset classes, with part of the portfolio giving access to the markets through use of alternative non-correlated investments which can return profit from unpredictable markets. For example, hedge funds can be an extremely useful tool to achieve better risk-adjusted returns by combining uncorrelated assets.

Many investment strategists combine a portfolio of investments which will all be similarly affected by the same events. Within a hedge fund, the investment manager not only has the ability to buy equities and property investments but also sell them without having owned them in the first place. Exchange traded funds and contracts for difference could be appropriate. They allow investors to go long or short on stock by trading on the margin. Covered warrants could also be considered. These are securitised derivatives giving you the right, but not the obligation, to buy or sell an underlying security at or before a predetermined date at a specified price.

It is likely that markets will continue to be volatile until the fourth quarter of 2003. At that stage, we will probably see markets concentrate more on profit results. The long-term outlook will be incredibly mixed, with some companies performing strongly and others facing a steady decline in fortunes.

I therefore present to you a balanced selectively global investment portfolio with non-correlated funds included in order to improve total risk-adjusted returns.


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