Where would you invest a million pounds? Surely a stupid question in the current climate? But it’s one that I have been asked several times quite recently and it certainly got me thinking.
The amount is of course quite arbitrary. But, just because we have a major downturn in almost every market and the banks have greatly reduced their lending and many — sadly — are finding their jobs are at risk, it does not follow that we should lose sight of looking for value in the current market conditions. The same old investment principles still apply:
- spread of different asset classes
- diversified portfolios and
- placing these in the context of the amount of risk you are willing to take.
In the past when a major downturn occurred investors raced to put everything into cash on the basis that banks were strong and you could not lose your money.
This time however, the interest rates are very low — currently below inflation — and many have lost faith in the banking system altogether.
All of which makes pure cash, as an asset class, unattractive. This does not mean that you should not have part of your portfolio in cash, but what I am trying to suggest is that, as a means of making a small profit, this approach is not going to succeed.
So it’s time to get down off the fence, I suppose, and make some alternative suggestions.
If the whole financial situation has caused you to reduce your appetite for risk, then one of the few flourishing areas is in private finance.
The reason this is doing well is precisely because the banks are not doing it. There are several funds that are doing quite nicely — and without a huge risk to your capital.
Many will be looking to replace the income traditionally provided by cash but are suffering from poor cash deals.
Again there is a fund that provides a guaranteed 8.15%pa income with a relatively low risk and your capital guaranteed into the bargain.
For those who have a higher risk profile there are some very exciting private equity investments out there, thoroughly researched, with a two to three year term before you reap the profits.
If you are an investor who is interested in utilities there is a fund that is looking for investors to go into the new methane gas extraction project on the Belfast foreshore dump site.
This is going to generate electricity, which will be fed into the local grid. There are also tax breaks attached to this project, which make it an additionally attractive proposition.
Of course one of the problems in a downturn in the markets is that costs weigh heavily on investors’ minds.
The good news is that the private finance funds and income fund I mentioned earlier have no initial cost, which means you are straight into profit. One can only hope that other fund managers do likewise.
Dare I mention the word ‘Property’? Well, there are perfectly good opportunities out there if you do your homework.
One such is an Enterprise Zone scheme based on pure commercial property. This has some interesting income tax benefits that bear looking at.
There are also other opportunities in this area that represent good value.
I would remind you that the traditional long-term returns from commercial property are approximately 9-11% per annum according to the Institute of Property Development (IPD) who keep the score on this.
In conclusion, there are some excellent investment opportunities out there for those with spare cash. But, more than ever, you will need to do your research before diving in.
Nicholas Watts is an independent financial adviser with Positive Solutions Financial Services which is regulated by the Financial Services Authority. To contact him, use the website www.realwealthmanagers.co.uk.