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In This Chapter

▶ Understanding basic investment philosophy

▶ Discovering your own money make-up

▶ Looking at where you may be investing already (whether you know it or not)

▶ Getting familiar with five basic investment choices

This chapter explains the first steps you must take in your investing ventures. But take heed: in this chapter (and throughout the book, for that matter) you need to think deeply about some personal matters, to understand yourself better and know where you’re going in your life and what makes you tick. In other words, you need to wear two hats – that of investor and that of self-examining philosopher. So be prepared for some tests that ask just what sort of person you are, what you want for yourself (and those around you) and what you’re prepared to do for it.

And if you don’t run into a test, such as a risk profile from a financial adviser, that’s no bar to testing yourself. Many ‘risk profiler tools’ online can help, but no matter how you go forward, the final decisions you make are down to you and no one else.

Understanding the facts and mechanics of investment decisions is just a start. Knowing how to apply them to your own circumstances, and to those of your family and other dependents, is what will make your strategy succeed.

What’s Your Reason for Investing?

This section is very basic, comprising just one simple Investing For Dummies test question: why did you buy this book? Chances are you probably did so for one of these four reasons:

✔ You have no money but want to make some. Most people fall into this category. You want to invest some money and accumulate funds but don’t know where to start. How you go about it depends on how well you can discipline yourself. Take heart, though: even the most confirmed shopaholic can build up a nest-egg for later use.

✔ You have some money, want it to make more and currently make your own investment decisions. You’re the traditional investor who wants to make your personal wealth grow. You already make your own investment decisions and want to get better at it. How you go about it depends on who you are, how you made your money and where you hope to be in 5, 10 or 20 years.

✔ You have some money, want it to make more and currently have others handle the investment process for you. Maybe you have fund managers or investment advisers handle your investments so you can gain tax advantages or because your savings are lumped together with those of others in a pension or similar fund. Or maybe your life is just too busy or complicated for you to do the investing yourself. Regardless, you now want to understand how investing works so you can either take over your own investment decisions or monitor what others are doing with your hard-earned cash. I’m not sure many people will pick up this book just to check up on the professionals, but I could be wrong.

✔ You’re now in charge of your pension decisions. Unless you work in the public sector, the chances are that you now have to take stock of your own pension arrangements. What you get when you retire is now largely up to you rather than your former employer or employers. And the new pension freedoms extend this choice into your retirement years. Because building up and then winding down a pension are likely to be the biggest investment decisions you make, Chapters 14 and 15 are devoted to helping you construct your retirement funds and then make the most of your pension’s nest-egg.

What’s Your Personality Type with Money?

Some people spend all they have each month (and then some on top – ouch!). Others put away a bit in the bank or building society on a regular basis. And still others buy and sell stocks and shares, with some going in for some very complex investments.

Test time: you need to decide whether you’re a spender, a saver or an investor. Doing so isn’t as easy as it looks, though. Spenders can be savers or investors. Savers can be spenders and investors. And investors are generally also savers and must, at some stage, be spenders. But most people are predominantly one of the three types – spender, saver or investor. Which category you think you fit into determines what you do from now on, how you react and how you progress.

Spenders have fun

Spenders are generally people who live for the here and now. They may want more than they can have and end up borrowing money, probably on plastic cards. For many spenders, accumulating cash for the future has no priority.

Here are ten attributes of spenders. If the majority of them apply to you then, yep, you’re a spender:

✔ You don’t look forward to the end of the month.

✔ You love new things: you’ll queue all night for the latest smartphone and your friends gasp when you tell them how much your new handbag cost.

✔ You have more than one credit card – maybe you use one to pay for the other.

✔ You can’t resist two-for-one offers, even if you throw half of what you buy away.

✔ You buy unnecessary clothes.

✔ You’re always first – and last – to buy a round of drinks.

✔ You believe in living a lot now.

✔ You see the future as a foreign land.

✔ You worry about money at times but then go out to the shops to stop fretting.

✔ You buy glossy magazines as much for the advertisements as the articles.

If you’re in this category, your first priority is to recognise that investors can’t always be spenders. Getting familiar with investing is a good way to accomplish this priority because it offers an alternative use for your cash.

Know that while on your way to becoming a saver or an investor, you can start with very small sums. You can become a saver with £1. And some regular stock-market-based investment plans start at £50 a month less than the cost of a coffee-chain cappuccino a day.

Savers have cash

Savers are people who want to keep their financial cake and eat small slices at a later date. Here are ten saver attributes. Tick those that apply to you, and if the majority do then you’re probably a saver:

✔ You have a surplus at the end of each month.

✔ You go to the supermarket with a shopping list.

✔ You don’t have a credit card, or you pay it off in full each month.

✔ You’re prepared to put off purchases.

✔ You’d rather buy second-hand than run up a debt.

✔ Your property is more important than your furniture.

✔ You look at the display windows at banks and building societies.

✔ You know what the current interest rates are.

✔ You believe in the saying ‘waste not, want not’.

✔ You’ve read Sorting out Your Finances For Dummies (published by Wiley) – or, if you haven’t, you’ll get a copy the next time you buy a book.

Saving is a stage you must reach before investing. You can be a saver as well as an investor, but you can’t be an investor without first saving up some money to invest.

‘Hi, it’s me, Spender. Can’t I just use my credit card to finance an investment?’

You can’t use a credit card to buy investment products over the phone, via the Internet or in other circumstances where you can’t send a cheque. Some of the reasons lie in the complexity of consumer credit legislation. Another factor is that financial companies only want you to invest what you can afford, although unauthorised, illegal and probably fraudulent offshore investment firms may try to sucker you into schemes by telling you to use your credit card.

But the most important reason you shouldn’t borrow to invest or save is that doing so only makes financial sense if the return is going to be higher than the interest rate charged. Paying 29.9 per cent annual interest – and that’s by no means the top credit card rate – is pointless unless you can be very sure that your investment will grow even faster and that your original capital will be safe. Both now and in all of history, no such investments exist.

And note that even if you could borrow at 0 per cent annual interest, you’d still have to be sure of getting your money back with one of those rare investments that can’t fall, in order to be better off.

Investors build up future funds

Investors are people who are prepared to go the extra mile to try to ensure that their wealth goes the extra thousands, tens of thousands or even more. Investors want control over their money but are ready to take a risk provided that they’re in charge and know the odds. They want their money to work hard for them – as hard as they worked to get the money.

You don’t need an MBA, a posh old-school tie or stacks of money. However, know that although you can sleepwalk into just saving your cash, you must be wide awake to be an investor.

As a pure saver, you really don’t have to know what you’re doing. You can just stash your cash under the bed, for example. As an investor, you must know what you’re doing and have the self-discipline to follow your strategy, even if the strategy is doing nothing, buying and forgetting, or benign neglect.

So are you an investor? Check out these attributes to find out:

✔ You have spare cash.

✔ You have an emergency fund for the day the roof falls down or the car collapses.

✔ You want more than the bank or building society offers.

✔ You think about your money-making strategy and tactics.

✔ You can face up to bad days (and there’ll always be some) on investment markets without worry.

✔ You’re ready to swap certitude for a bigger potential reward.

✔ You can afford to lock away your spare cash for five years at the very least.

✔ You understand what you’re doing with your money.

✔ You’re prepared to lose money occasionally – knowing it’s an occupational hazard.

✔ You’re ready to invest your time into growing your fortune.

All these attributes belong to an investor.

Working out where you fit

So, what’s your bottom-line personality type when it comes to money?

✔ You decided you’re an investor. Congratulations! You’re ready to embark on the road to growing your money. It won’t be easy. You may face stiff climbs, vertiginous falls, rocky surfaces, long deviations and dead ends. But give it enough work and time, and I promise that investing will work out.

✔ You didn’t qualify as an investor. You got as far as a saver and no further. Or you’re really stuck as a spender. You’re wishing you’d spent the price of this book on something else or stuck it in your savings account, where at the current virtually invisible savings rates it’ll double in about 100 years. Well, don’t regret your purchase or vow to send this book off for recycling, or try to recoup some of the price by selling it in a car boot sale. Stick with it. The very fact that you bought this book shows you’re ready to move on to investing when you’re financially and psychologically ready.

And even if you decide you never want to buy a share, sell a bond, invest in a unit trust or check on foreign exchange rates, this book is still for you. Why? Because you’re almost certainly an investor already. (The following section tells you how, if I’ve piqued your curiosity.)

Surprise! You’ve Probably Been Investing Already

Your financial fate already depends on the ups and downs of the stocks and shares markets. Few people can escape this fact, and every day the number of people who can ignore the investment world diminishes. You may be an unconscious investor or even an unwilling one, but there’s no running away from it; you’re already an investor.

Investing through your pension fund

The biggest amount of investment money you’re likely to have is the value of your pension fund. And whether you pay into it yourself, rely on your employer or build it up via a partnership with your employer, it all rides on investment markets.

Just to give you an idea of how much you may have, suppose that you earn £25,000 a year and put 10 per cent of your earnings each month into a pension fund that grows at a 7 per cent average per year. Here’s what your fund is worth over the course of 45 years (I’ve ignored tax relief on pension contributions, future wage rises, inflation, and fund and pension management charges to keep this example simple):

That’s serious money! And it all started with a first monthly payment of just £208! Of course, the assumptions I make are foolish. No one continues on a flat salary for 45 years – some see earnings soar and others stop work. And although the annual growth rate I’ve used is an average based on the past, whatever happens in the future, it won’t be smooth!

Most people haven’t a clue that they have the potential for anything like the preceding example over a working lifetime. But even if you’re aware of what you could achieve, I bet you didn’t know that you have a good chance of taking some investment control over that sum. Even if you don’t want to, at the very least you should be able to check up on what the pension fund managers are doing with your money. Understanding what other people are doing with your money can help you increase your own pension fund in good markets and prevent it from going down when the investment world turns sour.

Note that your pension plan isn’t the only area where you may be an unwitting stocks and shares investor. Endowment mortgages and other investment-linked insurance schemes also revolve around stocks and shares.

Investing in your employer

Millions of people are potential and actual investors in the company they work for. Most big stock-market-quoted companies, like British Airways or Wal-Mart’s UK offshoot Asda, offer employees option plans that give workers the chance to acquire a stake in the firm. To acquire that stake, workers buy shares, also known as equities, which I explain in the section ‘Get your share of shares’, later in this chapter.

The original idea was that giving someone the chance to buy shares in the future at a price fixed in the past would help motivate staff members and make them put in more effort, but in reality the idea only works if all colleagues work equally hard.

The original idea aside, the option plan is just a pay perk, but one that can be valuable. A variety of schemes are available, but the most common one is linked to a savings account known as Save As You Earn (SAYE). SAYE schemes have a monthly limit to encourage you to tread carefully, because putting all your investment eggs in one basket would be really daft. You don’t want your savings to collapse if your employer goes bust or makes you redundant.

In an SAYE scheme, you save from £5 to £500 a month in a special account that earns interest. When you start, you’re given a price, called the exercise price, at which you can buy the firm’s shares in the future. The account continues for three or five years (with an option to go to seven years). At the end, you can use the savings plus interest to buy shares in the firm at the pre-set price. If the price has risen, you make a profit, although you don’t have to sell until you want to. But if the price has dropped, you can walk away from the whole deal with the cash you’ve saved in the account. But you won’t get any interest at the present time – rates are just too low.

Some employee share option schemes aren’t a perk. They’re a danger – especially in small companies whose prospects sound brilliant (on paper, at least). You can easily be lured from a well-paid, secure job into risky employment with the promise of share options sometime in the future but a substantially reduced salary now. Most option plans lock in employees for a number of years, and by the time they take their options the shares could be virtually worthless, assuming that the company is still in business. Putting all your eggs in one basket is always an error, so never tie your fortunes so closely to one company. No matter how attractive the deal sounds, a wage packet bird in the hand is worth several options in the bush.

Being part of the economy

We’re all part of the investment scene, whether we know it or not. Every time you decide to buy an item or save your money or work harder or work less or go on holiday in the UK or abroad or do nothing, you’re part of the big picture that makes up the economy. You can’t avoid it, so find out how that economy can work for you rather than just working for others.

Between a rock and a hard place

Investment hasn’t had a good image recently. It started with the Northern Rock disaster back in 2007, where small investors in what should’ve been a rock-solid business saw their shares go down to the very hard place of zero. Northern Rock was only the beginning, followed in the subsequent year by the collapse or near-collapse of some of the UK’s and the world’s biggest banks, and their subsequent rescue with billions of pounds of taxpayers’ money. The media can characterise anything to do with finance – the City of London and New York’s Wall Street especially – as greedy, self-serving and even a threat to the planet. And yes, a lot of that’s true. Investment bankers have paid themselves bonuses to equal the earnings of football internationals and Hollywood stars. Since the banks started collapsing, scandal after scandal has ensued, with bankers accused of rigging just about anything they can get their hands on, including interest and currency exchange rates. Many global banks have been fined sums hitting billions. Somehow, unlike footballers or actors, they manage to pick up huge wage packets for failure, or unbelievable ‘severance packages’ should they actually be forced to quit. After all, hardly anyone else, and certainly not their bosses or their shareholders, has a clue what all their esoteric investments are about.

And when serious professional investors fell for Bernie Madoff’s $50 billion investment scam, you seriously had to wonder what it was all about. Madoff ran what seemed to be a very successful fund, although it turned out to be a Ponzi scheme. Named after 1920s swindler Charles Ponzi, these plans offer very high returns that they can only give to investors by using new money coming in to pay out anyone who wants to withdraw. When the new money stops or is slowing, the whole house of cards collapses. The scheme invests in nothing – other than the promoter’s secret bank accounts.

We’ve yet to come up with anything to replace the financial system we have at the moment, but the great crash should teach us some lessons. Firstly, never, ever take even the supposedly biggest and brightest investment brains on trust. Secondly, although no one will again fall for the mess of offering complex financial instruments and dodgy mortgages to people who had no hope of ever repaying, other financial bubbles will occur in the future. There’ll even be those who claim to have learned from the mistakes and who come up with an even better way of packaging these home loans.

So when it comes to your hard-earned money, never sleepwalk your way to ruin. As the old saying goes, ‘if it looks too good to be true then it almost certainly is’. No safe route exists to a quick buck; highly paid City types eventually run out of luck; guarantees given by the seemingly most august banks can turn out to be worthless; and you can’t even rely on governments to always back their promises.

Look out for the warning signs. Shareholders in Northern Rock, Bradford & Bingley, Halifax Bank of Scotland and Royal Bank of Scotland had plenty of chances to get out with something before the shares went down to zero (in the case of the first two banks) or down to pennies (with the second two), before government-sponsored rescues. Warnings were spread over a number of months.

So why did so many private investors ignore the signs? For some, their holding was so small that selling would have cost more than it was worth. But most had an irrational hope that things would get better and go back to ‘normality’ where prices keep rising. If the global financial crisis that started in 2008 has taught people anything, it’s that ‘normality’ includes disastrous crises as well as good opportunities.

Five Basic Investment Choices

All your money decisions, outside of putting your family fortune on some nag running in the 3:30, simply involve making up your mind as to where to put your money. Literally tens of thousands of choices are available online. And at least a thousand choices appear in many daily newspapers.

But you can cut that number down to just five possibilities by considering basic investment choices only. Get these right, or even just right more often than wrong, and you’re well on the way to financial success:

✔ Cash

✔ Property

✔ Bonds

✔ Shares

✔ Alternatives

Here’s a big investment secret: most professional fund managers – yes, those City of London types who pull in huge salaries and even bigger bonuses for playing around with your pension, savings or other investment money – don’t wake up each morning asking themselves which investments they should be buying or selling that day. Instead, they reduce the investment world to five big buckets that they call asset allocation, which simply means that they divide up investment money into the five areas in the preceding list – cash including foreign currencies, property, bonds, shares and alternatives. They take your money and allocate a portion to shares, another portion to property and so on. The fund managers, and especially the people who run large pension funds, know that if they get their asset allocation decisions right and do nothing else, they’ll beat the averages over the long term.

Can this theory fail? Yes, especially over the short term, by which I mean up to two or so years. In the great global financial crisis, almost everything went down. You couldn’t just move from one thing to another because whatever you switched to was equally under pressure. No single investment theory works all the time. The best I can do is to point you to those that have a good chance of working most of the time.

You can’t go wrong with cash

Having cash under the mattress can be very comforting when everything is going wrong in your life. But keeping cash under the mattress, or anywhere else at home, isn’t a good idea from a security point of view. Nor does it make sense for investors. Putting your cash in a bank protects it from thieves, fire risks, and perhaps the temptation to grab it and spend it in a shop.

You never earn much money just leaving your cash in the bank. Most bank account money is in current or cheque book accounts, which often pay just 0.1 per cent, an interest rate that, transformed into pounds and pence, gives you the princely sum of £1 for each £1,000 you have in the bank for a full year. And if you’re a taxpayer, that £1 may be worth as little as 55p after HM Revenue & Customs take their slice. Ouch!

Better ways of investing the cash that you don’t want today are available, including building society deposit accounts, online cash accounts, telephone banks and postal accounts. With all these options, you can get a higher interest rate but you have to give up flexible access to your cash in return. And you won’t make much. Since interest rates hit their lowest ever in March 2009, savers have struggled to get anything much, losing out to rising prices. But the situation won’t always be like that.

The longer you’re prepared to tie up your money, the better the rate of interest you receive. You can lock into fixed rates so you know exactly where you stand, but you must be prepared to hand over your money for a set period, usually one to three years, and throw away the money box key. Granted, some fixed-rate deals let you have your money back early, but only if you pay a big penalty.

Whatever you earn is cut back by income tax on the interest unless you’re a low earner or use an Individual Savings Account (or ISA). But does this matter? No. The best you can really hope for from a cash account is that the interest equals the rate of inflation – that’s the amount the price of things the average person buys goes up each year – after the tax charge on the annual interest uplift. If inflation is 4 per cent, then a 20 per cent taxpayer needs a 5 per cent headline rate to keep up with price rises – work it out and see! Suppose, for example, your savings account of £1,000 earns £50 interest, or 5 per cent, in a year. Take off the basic rate of tax (20p in every pound) and you end up with the £40, or 4 per cent, you need just to keep up with the rate of inflation. If you’re well off enough to pay tax at the top 45 per cent then you probably work for a bank and pull in big bonuses!

The whole point of cash investing is to use it when you’re uncertain or everything in your life looks awful. It’s a security blanket you can retire to during periods when all else is confusion or contraction.

Don’t disrespect this fact. Keeping a firm hold on what you have isn’t just for fast-falling markets. It’s a vital concept in the months ahead of retirement or any other time when you know you’ll want cash and not risks. You lock in the gains made in the past and can go ahead and plan that big trip, your child’s wedding or the boat you want to buy. Cash is what you can spend, and expenditure is the endgame of investment.

Property is usually a solid foundation

The property you live in is probably your biggest financial project – assuming that you don’t rent it from someone. Typical three-bedroom semis now change hands at £500,000 or more in many parts of the UK. And at the higher end of the market, no one blinks an eye any more at £2 million homes (not that most of us can afford one).

But is property an investment? Yes, because you have to plan the money to pay for its purchase, buying can help you spend less than renting and because you can make or lose a lot of money in property.

Property beyond your home can also be a worthwhile investment. Stock market managers run big funds like property because it rarely loses value over longer periods, often gains more than inflation and provides a rental income as well. Commercial property, such as office blocks, shopping centres, business parks, hotels and factories, is usually rented out on terms ensuring not only that the rent comes in each month (unless the tenant actually goes bust) but also that the rent goes up (and never down) after each five years, when the amount is renegotiated.

Bricks and mortar are as solid an investment as you can find outside of cash, as long as the bricks and mortar are real. A fair number of property schemes take money from you for buildings that only exist on the architect’s plan. This is known as off-plan purchasing. In many cases, these buildings eventually go up, although you may sometimes struggle to find a mortgage lender or a tenant – or both. Some don’t, however, and these cases leave you nursing a loss as the developers and their agents gallop off into the sunset with your cash. This bad buy-to-let industry reputation puts off many mortgage lenders even where the building is finished to specification. Additionally, problems with loans can make tenants wary – they know they can be evicted if landlords don’t have satisfactory financial arrangements.

Besides building up value in your own home, you have three main routes to investing in property:

✔ Buy to let. You become a landlord by purchasing a property that you rent to others.

✔ Buy into a property fund run by a professional fund manager. You can do so through personal pension plans, some insurance-backed savings plans and a handful of specialist unit trusts. These nearly always invest in commercial property although some now specialise in student accommodation.

✔ Buy shares in property companies. This is the riskiest method but the only one that can provide above-average gains.

Every week I get emails offering me ‘guaranteed returns’ from property or forests or farmland in some distant country. In many cases, the returns are promised over ten years and are truly enormous. I always delete these as trash. A ‘guarantee’ is only worth as much as the organisation backing it. And I don’t reckon too much on the chances of an offshore company being around in a few years’ time, let alone paying me what it promised.

Bonds are others’ borrowings

A stock-market-quoted bond is basically an IOU issued by governments or companies. Loads of other sorts of bonds exist, including Premium Bonds, which give you the chance to win £1 million each month at no risk, other than losing out on interest. But here we’re talking bonds from governments and big companies, which go up and down on stock exchanges.

Bond issuers promise to pay a fixed income on stated dates and to repay the amount on the bond certificate in full on a fixed day in the future. In other words, you pay the government, say, £100, and the Treasury promises to give you £5 a year for the next five years and your £100 back in five years’ time.

Sounds 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.

Diversifying is no monkey business!

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.

The easiest way to buy into bonds is through one of the hundred or so specialist unit trusts. But don’t take the headline income rate they quote as set in stone. It can go up or down, and no guarantees or promises exist. Some even cheat by hiding costs away. Always remember that the capital you originally invest in the bond fund isn’t safe either. It can go down or up along with investment trends and the skills of the manager.

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.

Want to know the most dangerous sentence in investment? ‘It’ll be different this time.’ Sometimes, that becomes ‘the new paradigm’. What people mean is that they’ve found a magic formula to find an investment that goes up but not down. People trot out that sentence whenever prices rise rapidly, and brighter investors start to question how long it can continue. The thing is, the situation never is different. Anything that people promise is a one-way bet is bound to run out of steam sometime, whether you’re looking at property prices, the price of wheat or shares in African economies. Share prices, and the values of every other single investment in this book, go up with greed and down with fear. As long as these human emotions exist, ‘It’ll be different this time’ will be the same nonsense as the last occasion someone said it. Expect to hear this phrase many times during your investment life!

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.

You can’t invest directly in a hedge fund unless you’re seriously, seriously rich. Some funds work on an invitation-only basis, so you wait until you’re asked! But you can sometimes put your money into a fund of hedge funds. This is a special vehicle that buys, holds and sells hedge funds. They’re sometimes offered to the general public – or at least those with the minimum £10,000 they usually require.

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.