Chapter Twelve

INVESTING

By hook or by crook, you have gathered up your wealth. You are keeping it intact, guarding it from nibblers. It sits comfortably on deposit awaiting your decision. How can you increase it, make it blossom and grow? Where do you start?

Financial advisers spring up like mushrooms - or rather, like toadstools, because they pop up in all shapes and sizes. Your family, your solicitor,   your bank, not to mention the building societies: they all poach on each other's preserves, claiming to offer one-stop shopping for your financial needs. Sales agents call you up or knock on your door. Other advisers, like investment brokers, sit in plush offices all day while investors flock to them and pay for their recommendations.

These advisers - all of them, in my experience, men - will act as though they were your favourite uncle or your favourite nephew depending on your age. They are not the least deterred by the fact that they possess no money themselves or have squandered what they did inherit.   You will find no females; aunt/niece play-acting does not carry the same authority.

Incidentally, steer clear of investment schemes 'designed for women'. This is invariably just a selling ploy. They are not one jot better than conventional ones.

So the first thing to tackle is:

HOW TO COPE WITH ADVISERS

People selling investment schemes, or insurance or pension schemes dressed up as investments,      spout fountains of jargon. They produce wonderful tables, graphs and figures to convince you that theirs is the best scheme. Or it was last year - or over the past ten years. Or it will be in the future.

Keep a clear head. Make them keep repeating and explaining. If you cannot write down in your own words what they have just said, you did not really grasp it.

Once you have listened to a couple, you will realize that they have little notion what the competition can offer. Many have been drilled like parrots that their own scheme is simply the best. They pile on the jargon to cover their own ignorance, and to earn their living.

Never commit yourself to buy on a first visit, even though they promise that you can change your mind and cancel within a few days. If you do cancel, you will be ashamed to see them again and feel a dithering fool. Remember, every salesman is taught to pressurize you into committing yourself on the spot. This is part of basic selling technique, regardless of the quality of the product. Once you realize this, you can recognize the push coming and brace yourself against it.

The best advisers want to know your personal situation to the last detail. They channel you into deciding for yourself what you want your money to do for you. Then they should have a wide range of alternatives  to offer to achieve just what you need. Few salesmen with only two or three schemes on offer, based on how much you can afford, can match this.

Remember the old saying: Free advice is worth exactly what you paid for it. Of course this does not apply if you are reading this from the internet! Otherwise, it contains a nugget of truth.

Remember too, if you do decide to pay an investment broker for advice, that if financial advisers could predict the future, few would still be working. They would lie stretched out on their yacht in the Bahamas enjoying early retirement on the proceeds of following their own advice.

Where good advisers stand ahead of you is in their understanding of the system, having followed the markets very closely for a long time. So they can recognize the trends. Beyond this, it is informed guesswork.

While you weigh up where to invest, make sure your money sits in the bank earning interest. If the amount if large enough, say £50,000 or more, tell the bank to 'put it on the money market with instant access'. This means they deposit it in a special account day by day. So you keep instant access. You can get at your money whenever you want without losing interest. The rate of interest on the money market varies from day to day. It will always be higher than normal bank deposit interest but remains as safe as a bank deposit account.

With smaller sums, don't forget that any bank usually offers several different deposit accounts.   Choose the one that offers the best combination of interest and access for your amount. Otherwise the bank clerk will automatically slip it into the account bearing the lowest interest. It is cheaper for them.

Do the same thing - money market or deposit account - if you are ever lucky enough to receive a big cheque through the post unexpectedly.  Bank it that very day. Put the money on deposit and tell the senders you have received it. If it turns out that there was a mistake, say a computer error, and the money is not yours, of course you must return it. But the interest remains yours to keep. Many fortunes are based on using other people's money.

DO I NEED AN ADVISER AT ALL?

Whether you need an adviser depends on the size of the sum concerned, how complicated your affairs are and your own ability. We look at this again in later chapters.

HOW DO I FIND A GOOD ADVISER?

How you find a good adviser is the $64,000 question. This area is a minefield. It is hard enough to find out whether you are dealing with an independent adviser or a sales representative. The first will be self-employed, the latter an employee, you may think. Not necessarily. There are hundreds of 'sham' self-employed consultants living on the commissions of one company or several.

Even while you are paying for investment advice, the adviser may get commissions from the organizations with whom he has persuaded you to invest. So how do you know whether he is suggesting the best policy for you or the one that pays him the most commission?

The government has tried to protect investors by passing laws. Advisers must now be authorised by the Financial Services Authority*, which has strict rules on commissions. You are entitled to ask any broker or adviser what commission they receive and they have to give you an answer. But how do you check the answer?

It is easy to get obsessed with avoiding commissions. Salesmen point out that what matters is how much income the organization achieves for the investors. It is quite possible for a well-managed organization that pays large commissions to earn far more income for its investors than a badly-managed one that pays small ones. True. The fact remains that organizations that don't pay commissions have a head start because they keep more of a client's money to invest from the outset.

All I can say with certainty is: never make your cheque out to the individual salesman, always to the limited company with which you are investing.

In passing, it may surprise you just how many organizations pay commissions. Most building societies and banks pay 1 per cent. If you personally walk into a branch and announce you have £75,000 to invest, they will not pay you £750 commission (1 percent). But if you pay your money to an adviser or accountant who then deposits it with the society in your name, the society will pay the adviser the £750. (This does not contradict what I said above. You are protected by the rules of the professional body - solicitors, accountants, and the like, regularly handle clients' money. Your solicitor collected your cash when you sold your house, remember.)

In the case of banks and building societies, don't worry. This commission does not come directly out of your money. Your full £75,000 is invested, pays you income and will be returned to you in due course.

Some advisers or accountants reap more money out of commissions than they earn from clients. If you know about the commission - and remember, you are entitled to ask - many advisers are willing to share it with you, half each. But they will not mention it unless you do. Remember that commissions are income and so taxable.

HOW DO I KNOW IF THE ADVICE WAS GOOD?

It is difficult to be sure if you have received good advice. Years may elapse before your investments come to fruition. Many financial problems have a whole range of acceptable solutions. There is an element of luck, never mind the crystal ball. If your investments turn out winners, great, but don't expect it.  Be satisfied with achieving a good average. Too many people waste time and energy looking back, with the benefit of hindsight and grumbling, 'If only...'

WHAT DO I WANT MY MONEY TO DO FOR ME?

Basically, when investing, you have three choices.

1. You can choose income. That is, you invest so that your capital earns you as much income as possible. A bank account offers an example of this sort of investment. It yields income - the interest it pays you - but your capital stays unchanged. It does not grow.

2. You can choose capital growth. This way, your capital, while not paying you any income,  itself grows as fast as possible. You buy a gold bar, silver bullion or a valuable painting. They all sit in a bank vault and don't earn you a penny although you may have to pay for safekeeping and insurance . But every day they themselves increase in value (you hope) so that, when you decide to sell them, you have greatly increased your capital.

3.  Or you can compromise and aim for some income and some capital growth at the same time, but less of both than if you went all-out for either. If you buy a house to rent out, you hope for income from the rent you receive and for capital growth so that you can sell it one day at a profit.

WHICH SHOULD I CHOOSE?

Take Elsie. She is 75 and struggles by on a small pension. When her sister Dolly leaves her a legacy she may say to herself, 'I don't want to sit back for twenty years and watch that money grow. I want to enjoy it now, while I still can.' So she will invest for income.

Equally, she might argue, 'I have all I need. I'm too frail to enjoy gadding about now. The more I can leave the Donkey Sanctuary the better.' So she invests for capital growth.

Yet again, she might reason, 'I don't need a lot, but a few extra comforts would be very welcome. After all, Dolly would want me to enjoy it. And if I can leave a nice nest-egg to Laura - she always was Dolly's favourite niece - so much the better.' So Else invests for mixed income and capital growth.

Moral: how you invest depends on your existing situation but also on your personality.

Look at Mary, in her thirties and happily married to Dan, who is a highly paid diver on an oil rig in the North Sea. She wants for nothing. But she worries. Her husband's job is dangerous and his age will force him to give it up before too long. She is anxious that when this happens, and even more so when they retire, their standard of living will fall.

When her lucky number comes up, Mary will want to invest her winnings for capital growth. This way, as large a sum as possible will be waiting when Dan has to abandon diving.

Equally, she might argue, 'Dan's money covers essentials. I would rather use this windfall now, while my children need it, to send them to private schools.' She will invest for the highest possible income to cover school fees.

Yet again, she might reason, 'A little extra income now would pay for an au pair girl. I could go back to college. This will help the time to pass while Dan is away too. The course will train me how to help Dan in the business he wants to start when he has to leave diving. And if I can provide a little extra capital then, so much the better.' Mary will invest for combined income and capital growth.

Or again, take Julie. She has just turned 50. Her husband is in a reasonable job, and she works too. They live comfortably but not luxuriously, with the future provided for. When Julie wins a cash prize in a competition, she has no immediate plans how to spend it.

Of course, if would be nice to have a little more to spend as she wants to. It would also be pleasant to think there was a little something she could leave her grandsons when she goes. She considers a compromise - to invest in something which gives her income now but also offers capital growth. This is what you might expect.

It overlooks Julie's gambling instincts. Her prize has whetted her appetite. Now she wants to increase her wealth as fast as possible, regardless of risk. This means investing for capital growth.

At the same time, Julie has always suffered under the snipes of her ambitious sister who married money. Julie only married Fred, a plodder. Julie would love to show her sister that she too can regularly afford luxuries. So she needs to invest for income.

Poor Julie, torn this way and that. She will toss through many a sleepless night before she makes up her mind.

Three women, three classic situations: one would predict pensioner Elsie would choose income, young Mary capital growth and in-between Julie a compromise. Yet each woman's decision could surprise you. Any investment adviser who tries to push you into a stereotyped mould is a bad adviser.

SO WHAT IS THE RIGHT STRATEGY FOR YOU?

You start with a thorough review of your present and future means and needs. This should not just be about you as an individual - unless you keep all your money quite separately to everyone else, and there is no one whose future you care about - but about you as a financial unit, which usually means a family.

Do you really need anyone to advise you? A proper financial adviser will guide you through an exhaustive check-list, asking hundreds of questions. You may find some rather personal.

His notes afterwards might include snippets like:

'Dislikes daughter-in-law and suspects she drinks.'

'Is afraid of father and son ganging up on daughter after she is gone.'

This is not mere spiteful gossip. Such facts are important considerations in trying to provide a client with what she wants.

You must struggle to be absolutely honest. If you only tell your adviser what you think he will approve of - 'I love all my children equally; I intend to support my aged parents' - you are asking for the wrong advice. Just like a patient who goes to the doctor and only reveals her 'respectable' symptoms: she must not be surprised if the doctor diagnoses wrongly and the pills do not cure her 'embarrassing itch'.

A good adviser used this detailed probing to build up a full picture of his client's present and future position and desires. A bad one looks her up and down twice and assesses all he needs from that - her age and wealth.

A good adviser then sifts through the hundreds of possibilities. He recommends those that should enable his client to use her money to achieve her goals.

Can you do this for yourself? You can if (1) you know the right questions to ask, and (2) you know about all the different schemes on the market.

Here are a few questions you might not have considered.

How much cash do you really need to keep in your purse/in the house/readily available in the bank? Women and old people are notorious squirrels, and the banks make fat profits out of their hoardings.

Like Zoe, who prided herself she never wasted a penny, yet kept £5,000 in her current account for twenty years: it never earned her a penny of interest. She rarely touched the money and wasted at least £500 a year! A classic case of that old fallacy, 'You look after the pennies and the pounds will take care of themselves' - just not true.

Many women who seek advice have never managed their own money before. A husband or parent always stepped forward to shoulder all the decisions.  Others, who have struggled through on their own for years, still could not answer the first vital question: Just how much do you need each year to live as you have been living? Don't guess. Look at old bills.

Now you realize why I keep stressing that you should look beyond the next pay cheque. To plan, you must look at the whole year together. Bills come in hiccups, a pile may fall together in one month - perhaps November, when you pay for a winter's coal or oil, or February, when Christmas and New Year overspending makes them seem much worse.

Then there are emergencies. Don't ignore any sudden expense because it was a one-off and can never happen again. You can assure yourself that something else equally expensive will.

Once you know the total that you spent last year, remember inflation and add on more for the future. Just how much to add on is one of the biggest problems of planning. Financial advisers abound in horror stories of how much you will need even to post a letter in a few years' time. (On inflation, see Chapter 17.)

What are the likely rainy days in your life? How much will they cost? When I was first married, had a job to keep and a mortgage to pay, I always kept a sum in the bank for an abortion - just in case the pill should fail and the doctor not be sympathetic. Fortunately I never had to use it.

How many of your worries could be taken care of  by insurance rather than keeping a lump sum on hand? Are you frightened your husband might die and you might not be able to keep up the mortgage and lose your home. Take out mortgage protection insurance. Most building societies insist on it anyway, so maybe your fear has already been provided for.

Are you scared that your husband's death would leave you and the children destitute? You can take out life insurance on his life if he refuses to do it for himself. Some policies don't insist on a medical.

Do you worry that if he suddenly became too ill to work, you would become poor? You can buy permanent health insurance. It pays out a 'salary' for the rest of his life where there is permanent disability.

People worry about all sorts of problems, most of which can be insured against. Some complain that insurance is a year-by-year drain on their income. True. But they are the same people who buy a fire extinguisher and then complain they never needed to use it.

Perhaps your worry is genuinely insoluble, like that of my client Valerie, whose husband risks his uninsurable life every day as a steeplejack. She can only invest to aim for capital growth. His high-risk occupation brings its own high income.

When do you think you will need more money? On retirement? In widowhood? In extreme old age, when you can no longer look after yourself? Are you likely to need an operation shortly and would rather pay to go private than wait in pain?

What projects do you cherish for which you need funds (anything from a world cruise to the aim to go freelance in five years' time)? Perhaps one of your children shows a special talent, say, ballet, for which grants are not available at an early enough age; or you would like to set a child up in business. Do you aim to buy a holiday cottage, pay to educate your children, take a year or two off work to follow the art course you always hankered after, even leave your husband as soon as the children are safely off your hands? Some people fret for years that they might not leave enough money to pay for their own funeral. Whatever your project, your money should be invested towards making it possible. And a good adviser  will have heard it all before, so don't worry about shocking him.

When you have worked through all these questions, including everyone whose future you care about, and written down your answers, you are some way along the road to decide what you want your investments to do for you. You also know a lot more about yourself. The next step is to investigate the sorts of investments that are available and what they can offer you. I have given them a chapter to themselves.

* Financial Services Authority http://www.fsa.gov.uk  You can check a firm's authorization free on-line. They provide many useful booklets too. 25 The North Colonnade, Canary Wharf, London E14 5HS

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