Play the markets your way
Article Date: Jul 12 2006
Active 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
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.
