Play the markets your way

If you're reaping financial rewards from your business, why not swap sides and invest your hard-earned cash in other enterprises?

Growing your own business involves vision, determination, relentless concentration and single-mindedness and can, if you overcome the myriad obstacles, be a good earner. While you’re reaping the rewards, at some point you’d be well advised to set aside some of what you’ve accumulated to invest elsewhere. This is a prudent way to take some of your eggs out of one basket to spread your risk and is also a means to gain more immediate rewards than are yielded by the long-term process of building up a business. And there’s no shortage of investment types from which to choose.

You can buy conventional quoted company shares, government stock or fixed interest securities. Property, investment trusts, tax-efficient vehicles such as limited partnerships, film finance, forestry and Enterprise Investment Schemes are also on the menu, points out Ben Yearsley of broker Hargreaves Lansdown, which runs discretionary accounts for individual clients committing £100,000 or more.

Alternatively, if you want to take a more active role yourself, you can play the markets, either by buying shares directly, or indirectly through derivatives, such as Contracts For Difference or spread bets, handled by firms such as IG Index. These instruments can cover market indices, interest rates and commodities as well as traditional gambling contracts on racing and other sports.

Patrick Latchford, business development director at IFX Markets, one of the specialist providers of derivative trading services, says budding and established entrepreneurs are among the company’s most enthusiastic clients, along with ‘retired fund managers’. Spread betting attracts punters of all shapes and sizes, ‘from dustbin men to millionaires’ and they can make handsome short-term gains – as well as daunting losses, particularly in current market conditions.

If you know exactly what you want to do, dealing in securities and derivatives can now be done online or by more conventional means through ‘execution-only’ firms at competitive commission rates. But if you want advice and informed suggestions and tips (and have a large enough investment portfolio), building up a relationship with your broker may make more sense, though it does not come cheap.

Be realistic

Entrepreneurs may have grown accustomed to doubling their own young businesses every year or at least squeezing annual returns of 40 per cent or more out of them. Most advisers warn that it’s important to adjust to the very different world of portfolio investing. Investment markets can fluctuate, sometimes widely, in short spaces of time and, unless you are a magnate of George Soros proportions (or a high-risk chancer such as derivatives player Paul ‘The Plumber’ Davidson), you are not going to be able to influence what happens in the way you can with your own business.

Individual investments can move dramatically, sometimes from a few pence to many pounds or vice versa, as the dotcom bubble and recent resources boom have shown. You could either be lucky or well informed enough to pick tomorrow’s Microsoft before it hits the headlines, or unlucky enough to buy the next Marconi at the top of the market. Most experienced market professionals suggest an annual average return of five to ten per cent over the long term is a more realistic target, however.

Stuart Fraser, head of investment allocation at broker Brewin Dolphin, says, ‘A common feature of first-generation money people is that, having grown their wealth 100 per cent themselves, they don’t want to hand it over to some idiot to lose it. But they need to moderate their expectations and accept a lower return on portfolio investment, as it’s the price they pay for the advantages of reducing their risk by spreading their exposure.’

These self-made success stories can be ‘a difficult breed’, he laments. ‘They think they’re God’s gift in everything, but running their business is far simpler than running investments. These people don’t realise you can’t control markets in the same way as your own company. Lots of clients in this category are happy to take risks with their own enterprises, but they don’t like to accept risk outside them.

‘Second-generation money is quite different,’ he adds, ‘more used to relying on advisers. It’s the hands-on guy who can prove difficult.’

On this point, Fraser is blunt. ‘Don’t try to involve yourself directly in the investment enterprise. You may be first-rate at running your own company, but why should you be able to run another type of business?’

Yearsley at Hargreaves Lansdown echoes the view that entrepreneurial clients need to think hard before committing their money. He says clients need to answer some key questions for themselves before plunging into investment markets. ‘What is your attitude to risk?’ and ‘How much time are you going to be able to commit to your investments?’ are among the most important.

If you are not going to have the time to make investment decisions throughout the day, you will need to develop a rapport with an investment manager who understands your motivations, inspires your confidence and can be trusted to carry out your wishes.

Portfolio Investing – What to go for

One reason for portfolio investing is to reduce the risk of total dependence on your own business and a cool, calm and unsentimental head is needed to make the most advantageous moves in the investment game. Therefore, it probably makes sense to steer clear of putting money into the same sector as your own company – unless your information is so good it falls only a whisker short of insider knowledge. ‘If you buy into quoted companies, they should be in different areas from your own company,’ urges Yearsley, explaining, ‘you don’t want to go down the drain together.’

Many entrepreneurs make their first outside investment in property, ‘which they understand’, says Fraser, before moving on to other instruments. Index-linked gilts (Government securities) provide the most freedom from risk, but precious little else, while past evidence suggests equities will outperform almost everything else, except perhaps property.

Investment trusts and unit trusts represent potentially advantageous long-term investments, provided you have assured yourself of the fund manager’s track record, skill and probity, as well as checking that the fee-charging structure is fair and not stacked against you and in the manager’s favour. A unit trust, from which holders can redeem their investments, may perform very well in a ‘sexy’ sector but be vulnerable to a flood of redemptions if the market turns downwards.

Hedge funds, which can sell short as well as buy shares, have attracted a somewhat lurid reputation as high-risk corporate manipulators. But the sector has ‘grown in maturity and transparency’, argues Fraser, and can offer a worthwhile play.

‘If you expect them to generate consistent 25 per cent annual growth, that has risk,’ he warns. ‘But, using a strategy of short sells and long buys [selling stock then buying it back once the price has dropped], they can certainly outperform the market.’

If tax considerations are important, there are several alternatives to consider, some long-term and illiquid and others quite the reverse. Enterprise Investment Schemes, film finance and the like come with generous tax reliefs and can, in some cases, provide handsome returns, but you may have to wait some time before being able to make your exit.

Venture Capital Trusts also bring fiscal incentives. Investing on AIM, the London Stock Exchange’s successful junior partner, VCTs offer tax relief on capital gains and losses, and inheritance tax, among other boons.

Active investing strategies

If you are going to take an active role in investing, especially in shares, there are several different approaches you can take. Some rules hold good most of the time, such as that falling interest rates tend to be good for equities and property and vice versa, but no approach is right all the time.

You can follow ‘momentum’, that is, go for what everyone else is after, hoping that the ‘weight of money’ will push it forward. This can work very well for a time, but as previous market events have shown, some of the hottest performers can become the fastest fallers and you don’t want to be left holding the parcel when the music stops.

Alternatively, you can adopt a ‘contrarian’ stance, arguing that at some point, usually at the top or bottom of market cycles, the investment consensus is always wrong. In theory, this should lead you to buy at the bottom and sell at the top, but calling these changes is notoriously difficult and being vindicated in the end may be scant compensation for missing out on making money along the way.

‘Value’ investing means picking companies whose fundamental merits you believe to be such that they are worth holding and/or buying for the long term, whatever the short-term vicissitudes of the market. Another approach, which can be applied to almost any type of investment, from shares to currencies, commodities, property and economic and financial indices is ‘technical’ analysis or ‘chartism’.

This approach, whose exponents include Brewin Dolphin’s formidable chartist Richard Lake, ignores fundamental questions about specific investments and looks instead at the patterns of its past price. These will suggest, for example, how long it is likely to go in one direction before losing momentum, what are the ‘resistance’ levels through which it must convincingly break to enter new price territory and what ‘support levels’ it must breach to portend a new downward lurch.

Many advisers urge against daily and short-term dealing, unless you have the time and aptitude for it – and years of focusing on the minute affairs of one business may or may not provide the appropriate experience for it. At Brewin Dolphin, Fraser is adamant about this point: ‘If you have £5 million to invest, don’t try to trade it constantly.

‘It’s a myth that this is the way to succeed. Such an approach does not outperform in the long term and it requires considerable skill.’

Derivative dabbling – CFDs and Spread Betting

Not everyone agrees. Contracts For Difference (CFDs) have become increasingly popular, where you buy not the underlying security, commodity or market index but the difference between today’s price and a future price. Latchford of IFX points out that CFDs are exempt from Stamp Duty, which is otherwise imposed on securities and property transactions.

Spread betting is also on the up, which is where you buy or sell a particular price of a security, commodity or whatever at a point above or below a given level. This can cover anything from stocks and shares to the number of line calls at Wimbledon and counts as gambling. It’s therefore tax-free – unless you’re deemed to be doing it as a full-time job.

‘If you sell gold at $100 a point (that is $100 for every $1 fall in the price) and the price falls $50, you will make a $5,000 profit,’ explains Latchford. You can up the stakes considerably by ‘gearing’, that is, putting up only a percentage of your commitment, provided your dealer agrees.

Thus you could buy a CFD for £25,000-worth of shares by putting up only £2,500. If the price rises to £27,500, an increase of ten per cent, you will make a profit of 100 per cent on your outlay.

But you do, of course, run the risk of having your stake wiped out and owing many times what you put down if the price goes the wrong way. As ever, remember the golden rule – decide what you want out of your investment, be it reassurance and safety or excitement and risk, before you part with a penny.

Alan Dobie

Alan Dobie

Alan Dobie was assistant editor at Vitesse Media Plc before moving on to a content producer role at Reed Business Information. He has over 17 years of experience in the publishing industry and has held...

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