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- Low Risk: Cannot lose anything.
- Medium Risk: Can potentially lose money but not all.
- High Risk: Can possibly lose all of your investment
- Ultra High Risk: Can potentially end up owing money.
There is of course an upside to risk. Usually, the higher the risk, the higher the potential reward. So investors should only ever make an investment where there is any chance of losing some or all, if they can afford to do so. Coming into 2012 with a strong focus on a new recession that is very likely to begin and the impending euro zone crisis, investors have new concerns to think about. A successful entrepreneur may be quick to tell you that a recession is the best time for opportunity. Whilst a trader may tell you that a recession means that emerging markets and hedging are your two best friend. As we look at the ten best places to invest leading into 2012 we look at the vision of what industries will see growth in a world that is currently filled with political and economic turmoil. Common perceptions of ethical investments have moved to the forefront of government backed ideology and traditional investment bankers are currently considered less trust worthy than politicians. Important aspects to consider;
- Seek an Emerging Market
- Avoid investments that could potentially create a debt
- Only invest what you can afford to lose
- Expect BoE interest to stay low into 2013
- ‘Greed’ is no longer seen as ‘good’
- Global governments are leading financial mechanisms for social and economical change.
Carbon Offset Trading
Carbon offsets are part of a unique business model allowing investments to not only benefit the investor financially, but also the projects they support and the environment. Unlike other commodity investments such as precious metals or wheat, carbon offsets create industry in parts of the world where poverty is high and their local environments are the most likely to suffer due to the need for energy. Figures show that the investment market for carbon offsets has been growing in the past three years. By the end of 2009 alone, the carbon offsets exchange reached $8.7 billion in value while the value of the international carbon markets was estimated at $103 billion. The overall value of the carbon market in 2010 was estimated at $124 billion. Barclays Capitalgoes as far as to predict that carbon will grow to be the world’s biggest commodity market. Carbon offset investments can have two main aspects:
- Buying produced carbon offsets from the carbon market with the purpose of reselling them in the future for profit.
- Retiring carbon offsets to offset your personal or business creation of carbon emissions. This is often done to either meet legal requirements or to become a carbon neutral person/company.
There are numerous types of carbon offset products. The most common are VER (Verified or Voluntary Emissions Reduction) Tip… only purchase Gold Standard VER’s. A CER (Certified Emission Reduction) and an EUA (EU ETS Allowance). Of these three asset types note that only VER’s are not yet exchange traded. They are OTC ( Over The Counter). OTC is the way big banks often do business but this also high lights that liquidity is not yet so high. Along with almost every other asset in the global economy EUA’s and CER’s have seen a fall in their price during 2011 whilst Gold has skyrocketed to new highs. Investors who buy low and sell high can see that Gold is likely to soon see selling off whilst carbon is likely to see heavy gains. With VER’s being over the counter, a Gold Standard VER is in good position to weather the economic storm and would be our best pick. Warning: Beware of Carbon Credit sellers who are really just selling land projects with prospects of them creating carbon offsets at a later date.
ISA Individual savings accounts allowance (ISA limit 2011). An ISA is widely seen as a sensible way to invest a limited amount of money. It is a good place for investors with no risk appetite and is barely influenced by the broader economic changes up or down. The 2011/2012 Cash ISA limit is £5340 with the overall annual ISA limit being £10,680. The deadline to use the 2011/2012 ISA allowance is 5th April 2012. From April 6th 2011, ISA limits will increase in line with the Retail Prices Index (RPI). This means the overall ISA allowance has increased to £10,680.
RISK: Medium – High
Limits your tax liability and reduces the time you spend reading the FT if you would rather someone else do it for you. It is worth noting that an investment trust that only takes long positions in equities may struggle to see any growth during 2012. Investment Trusts are companies that buy and sell sharesin other companies. When you invest in an investment trust company, you become a shareholder of that company. Your shares will rise and fall in value according to supply and demand for the shares. Investment trusts enable you to spread risk by investing in numerous other companies – without the hassle of having to buy, monitor and sell shares individually. You can have shares in as many different trusts as you like. The investor is taxed as for any other share – Dividends are received with a tax credit of 10%. Non-taxpayers cannot reclaim this tax. Lower rate and basic rate tax payers have no further liability. Higher rate taxpayers are liable to a further 22.5% on the grossed up dividend.
RISK: Medium – High
Open ended investment companies were introduced into the UK in 1997, from Europe. Open-ended means shares in the fund will be created as investors invest and cancelled as they cash in. Closed-ended funds like investment trusts have a fixed number of shares to be bought and sold.
OEICs have a structure somewhere between an investment trust and a unit trust. A single price is quoted for OEIC shares, and a levy shows the cost of buying and selling the shares. This is shown on investment documentation along with the:
- Gross amount invested;
- Initial charge;
- Net amount used to buy shares.
Not the most exciting financial product out there but a stark contradiction to day trading. An investment bond is in fact a whole of life policy usually paid for with a lump sum or single premium. Proceeds can be taxable if the investor is a higher rate taxpayer and may also be taxable for lower rate taxpayers. The money invested is used to buy units in a selected fund. Most insurance companies offer a wide range of funds from low to high risk. 5% of the original investment can be withdrawn each year for 20 years (until entire capital is returned), deferring taxation until final encashment. The main Advantages of an investment bond are given below.
- Packaged investment for growth
- Can take income by cashing in units
- Simple to operate
- Wide range of geographical funds available.
Property / Real Estate
RISK: Medium – High
POTENTIAL: Low – Medium
Property used to be the bread and butter investment type for serious low to medium risk investors with some investment capital lying about. But with so many homes lost in the UK but especially in the US we have decided to describe its risk as medium-high. Property has become a trickier type of investment to create without £100,000+ in cash or perfect credit in these continued low liquidity and tight credit times. For those who keep track of the real estate market, buying, selling, and renting property could be a viable financial investment. Not only will you realize capital gains if you invest in the right property, there is also the possibility of earning rental income. If you had purchased your property relatively early in your career, at retirement you may have paid off the property’s mortgage and so whatever rental income accrues is basically your profit (minus, of course, maintenance).
Stocks and shares
RISK: Medium – High
Once again there has been a change from the traditional risk rating here. Main market shares such as those on the FTSE100 used to be classed as medium risk. However after so many well-known companies such as Woolworths in the UK, GM and AMR in the US have filed for bankruptcy over the last few years there is a real, though slight chance a total investment could be lost. A stock normally represents your ownership within the corporation. The advantage of holding a stock is that not only do you own a piece of the company; you also have the liberty to trade these instruments in an open market (and thus realize capital gains) and reap income in the form of dividends, which are declared when the company makes profits. Stocks, as an investment class, are very volatile and may be subject to sharp market fluctuations and uncertainty. Long term stock holders often lose track of their portfolio value, especially in the less liquid indexes such as the AIM which could lead to missing out the best time to sell
Foreign Exchange / Forex / FX Trading
RISK: High – Ultra High
Forex trading is a curiously unregulated investment market considering the ultra-high nature of any leveraged investment product such as this. There are different types of investing: long, midterm, and short term investing. These trading styles can also be referred to as position trading for long term investing, swing-trading for midterm investing, and day trading for short term investing. Investing in forex is probably not the best investment for the inexperienced trader. If you go for long term trading then you need to know how to pick long term trends. If you are wrong then you will lose a great deal of your investment account. The same logic goes for midterm investing. This is one reason investing in the forex market should be done by experienced traders. But a trader can get the experience by trading a demo account, offered by most brokers for free. We feel that the forex market is a great tool for short term investing; this is where you are in the market for a few hours up to a few days. There are traders that do very well staying in a trade for long periods of time from months to years. But the long term traders are usually experienced and seasoned traders. No Matter what the trading style the investment needs to be watched and monitored.
Spread betting / CFD’s
RISK: Ultra High
POTENTIAL: High – Very High
Spread betting is essentially gambling and rewards are therefore tax free. Investors speculate on two possibilities namely the upward or downward movement of an individual share, currency, or commodity, value, or a stock index – such as the FTSE 100 Index, Nikkei 225 Index, etc. – in the futures. Spread betting firms offer two prices, a price at which a security can be “bought”, if an investor believes that it will increase in value in the future and a price at which it can be “sold”, if the converse is true. The difference between the two prices is known as the “spread”. An investor does not actually own any assets, however he or she is purely betting on the movement of the market. A CFD which is not a form of gambling though almost identical to the layman stands for “Contract For Difference”. This is an agreement between a broker or a CFD provider and a trader to exchange the difference between the opening and closing price of a share during the lifetime of a trade. Instead of explicitly buying or selling the underlying asset, an investor places a CFD trade which mirrors the movement of the underlying asset. It results in a profit or loss at the end of the trade. This “trading on margin” as it is known, for which an investor does not actually own shares, means that profits can be realised whether the market is rising or falling.
RISK: Medium – High
A REIT, or “Real Estate Investment Trust”, is a company that owns and usually manages commercial or residential property like apartments, offices, factory space, etc. on behalf of shareholders. This allows shareholders to invest in property without actually having to own the property outright. The major advantage of a REIT, in this respect, is that it is much easier to buy, or sell, shares in a REIT which are traded on major exchanges than to buy, or sell property in the traditional way. A REIT must in order to maintain its REIT status, pay at least 90% of its taxable income annually to shareholders and invest at least 75% of its assets in property.