How to invest money in these difficult times?
If you have a lump-sum to invest, or even if you just want to preserve what money you have accumulated, in these tough times, how would you invest for a comfortable life?
The “Credit Crunch” is in the news a lot and is portrayed as being an economic disaster for everyone, but are there any areas that we can invest in, that, while not necessarily making us rich will preserve our wealth and provide an income? This article explores some of the possibilities.
Disclaimer: Information in this and other linked articles is unregulated and for general information only and is not intended to be relied upon in making specific investment decisions. Appropriate independent advice should be obtained before making any such decision.
How to invest a lump-sum:
Or. I Eat Credit Crunch For Breakfast!
I was prompted to research and write this article, when someone asked me the question: “What would you do if you won the lottery?” and the answer I came up with was rather boring, but very sensible: “Invest most of the money” But, of course, the same principle would apply for any lump-sum or even the money you save each month. The question is, where to invest.
If I did win the lottery I would first of all be very surprised, then thank the kind person who bought me the ticket. I have never done the lottery in my life. But this article is really about how to invest a lump sum, however you got it in these difficult times.
How to Preserve Your Wealth:
And hopefully get richer too:
If I really did come into the sort of money that lotteries used to pay out, what would I do? I’m afraid I would be boring, and invest it, and only spend or give away the investment returns, the dividends and interest. I certainly would not waste it (I hope). I would not buy a big house, at the moment. I got out of the housing market a while ago, preempting the downturn, and I am renting a fantastic property, worth far more than my old place, and yet costing less to rent, than many people’s mortgages. The best use of a wind-fall now for many people would be to use the investment returns to rent a better lifestyle rather than buy one. The moving costs and stamp duty on a million pound property would, in some parts of London at the moment, pay for two years rent of the same place (i.e. free accommodation) If prices dropped by 25% as is being predicted you would be hundreds of thousands of pounds richer in two years if you rent. I am not necessarily condoning selling your house and renting just for the sake of it though. That’s a risky thing to do. Only if you were to move anyway.
The Inverse Lottery:
Before I get onto the subject of investing, first a bit about lotteries. The way out of financial hardship or a waste of money?
Buying lottery tickets is probably not the answer. I have invented a far better way of playing the lottery called “The Inverse Lottery”. To play this, you don’t need to buy a ticket, just choose the numbers (or use the same numbers each week) and watch the draw. Most weeks you will effectively win £1, with the very small chance of losing millions. Choose several sets of numbers for a greater chance of profit, or possible nervous breakdown.
The main problem with lotteries is the publicity. Winners are immediately hounded by the press and their family and friends they never knew they had, who somehow feel they deserve some of the spoils. If you earn or inherit lots of money, or make money from clever investment, people in general do not think they deserve some of it, but with winnings it seems to be different. The media then revel in the way you subsequently mess up you life and end up poor. An alternative, but similar investment is National Savings Premium bonds which are a kind of million pound, government run lottery from which you can get all of your money back at any time (and no one knows if you have won, unless you tell them). I have written a separate article about these.
Lotteries and Competitions:
I don’t believe you can influence your chance of winning a lottery (except by buying more tickets) You can improve the chance of getting a bigger prize if you do win, and there are many books on the subject, but I think other kinds of prize-draw or competition are generally better. Regular investment is better still, but that takes a very long time, before you are rich.
Buy a mixture of assets as an insurance against market volatility.
The most important thing to consider when investing is to have a balanced portfolio. I have written a separate article about how to balance an investment portfolio but briefly you must have a mixture of assets including exposure to cash, stocks/shares, bonds, property (e.g. your home) and some commodities and precious metals.
Gold is a great way to gain exposure to precious metals, preserve wealth in difficult financial times and surprisingly, perhaps one of the best ways to buy gold is from eBay. The premium over the price of bullion gold is low compared to that for a gold dealer.
Where to Invest?
Buy Gold Coins for “Insurance”:
But where to invest? Every day the newspapers, TV and internet tell us that the “Credit Crunch” falling house prices and inflation will make us all poor and investment is futile. Sticking my hypothetical lottery winning in the bank will leave it exposed to income tax at 40% (in the UK) and inflation, currently running at 3.5% or 4.5% if you believe the official figures and over 10% if you take the money-supply figures (central banks flooding the world with newly printed money which will eventually filter through to real prices) There is also the chance of the bank going under and losing everything over £50,000 (in the UK) in each bank, so the money would need to be spread around.
I could invest in government bonds (or Gilts in the UK) which are completely safe, but pay just 3% and therefore don’t beat real inflation by much. There are however index-linked Gilts which do beat RPI inflation by about 1.5%. But how dull. Zero Dividend Preference Shares can pay out a healthy 9% APR or so with not much risk and are tax-free up to the capital gains tax limit then taxed at just 18%. Gold and silver are also quite a good safe bet and preserve of capital and gold sovereigns have the little known feature of being capital gains tax free (in the U.K.) because they are legal tender. They can be bought for less than their bullion value on eBay. i.e. traded for close to the actual price of gold. They don’t, however, pay an income, unless you sell off the capital gains.
Zero Dividend Preference Shares are fairly obscure and most people don’t know about them, but they do behave like a bond in that they become more valuable as interest rates fall. Interest rate have fallen, but inter-bank rates (Libor) are still high, so there is still a lot of scope for growth in zeros and bonds. Corporate Bonds seem to offer even more value than Government bonds – paying high yields, with plenty of potential for capital growth, but with some risk. These are best bought through a fund (mutual fund, unit trust, investment trust, or Exchange Traded Fund – ETF)
Blue chip shares are also a good long-term bet as they pay a nice dividend to live off and grow approximately with inflation, unfortunately they have had a torrid time over recent months and are still a bit scary because no one really knows how far the current credit problems extend.