I am an experienced investor. What can I invest in to get a real return on my money while markets remain unpredictable? What else do I need to know about?
As you know, the main purpose of financial planning and investment is to create financial independence, when you own the properties in which you wish to live and have guaranteed income after tax that is greater than your budgeted expenditure.
Having protected your finances should you die, become disabled or incur a critical illness, it is important that your assets are invested in a tax-efficient manner in order to create spare income or capital for you. This applies to the short term should anything happen to you and over the longer term to ensure you live comfortably in retirement.
The savings gap in the UK is calculated to be over £27bn and it is estimated that, to close this gap, every household will need to save an extra £1,400 a year.
An individual's tolerance to investment risk varies based on the time period of the investment and how speculative he or she wants to be. It is normally sensible to utilise lowor no-risk investments such as cash over short time periods due to the volatility of the investment markets.
Over the longer term, many people have a balanced attitude to risk in order to make a profit without facing the prospect of their investment reducing substantially.
To achieve long-term real returns, it is necessary to invest in asset-backed investments such as shares and property. However, as you will know from events in the last few years, the value of shares can decline in value, as can the value of property.
There are four main classes of investment – 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. I assume that you are familiar with the popular collective investment scheme structures such as unit trusts, Oeics and investment trusts.
An investment vehicle that has become more popular over the last 10 years is the hedge fund. This can be an extremely useful tool when trying to achieve better risk-adjusted returns.
This can happen because the manager of the fund will combine uncorrelated assets. Most traditional funds will provide returns that are closely correlated with the movement of the stockmarket(s) invested in. The benefit of hedge funds is that the fund's value does not need to follow the movement of the assets invested in. Often, these funds have target investment returns and strict risk controls.
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. This gives the manager the ability to take advantages that can arise from time to time in the markets.
Some of the world's leading fund managers are leaving traditional investment companies to set up their own hedge fund operations as they believe hedge fund management requires more skill and they can make money in both rising and falling markets.
Hedge fund managers can sell short when they think a stock will drop in value. They borrow the stock, sell it and then repurchase it when the price has fallen, thereby making a profit. For traditional collective investment schemes, the manager must buy long – buy a stock and hold on to it with a view that the price will rise over time until it is sold.
Some believe that hedge funds are an asset class in their own right and they can undoubtedly form part of an experienced investor's portfolio. When investing, check if there is an initial charge or simply a performance fee paid to the manager as this can prove to be cheaper.
The entry level may be through a fund-of-funds hedge fund. These have existed for over 30 years. Over time, it can be illustrated that multi-managed hedge funds have delivered the same returns as global equity markets but with one-third of the volatility, remembering the past performance warnings.
There are many alternative non-correlated investments which can return a profit from unpredictable markets, such as exchange traded funds, which became available in the UK two years ago, and contracts for difference, which allow investors to go long or short on stock by trading on the margin.
The use of derivatives offers the experienced investor a way to make profit from volatile markets, remembering that, in some cases, the risk to capital can be greater than the original investment.