Taking an investment risk can be rewarding

    21 May 2020

    What’s your appetite for investment risks? For many retail investors the answer is not much at all: according to investment platform AJ Bell, which provides funds based on varying levels of risk, only a third of customers put any of their money in the ‘adventurous’ pot. Indeed, the common wisdom is that most investors  prefer slow and steady growth over sudden peaks and dips.

    Yet even the most cautious investors won’t have had an easy time of late. We’re all familiar with the image of the stock markets as a gradually ascending mountain range (where the occasional downward slopes are cancelled out by bigger rises in future), but if you’d started investing in the past year you might find yourself wondering if we’ve veered off-piste.

    Even so, the corona crash has vindicated one of my personal rules of investing: always put aside a small chunk of your money (no more than 5 per cent) to experiment with your own judgment. Not only will it help make your portfolio more balanced — ensuring you’re not too exposed to the general flow of the FTSE — you might find that, in topsy-turvy times like these, it pays off handsomely.

    You might use your ‘risk money’ to test a personal theory about an underappreciated part of the economy. If you read the back pages of this magazine, for example, you’ll have read Rory Sutherland extolling the virtues of video-conferencing for years. If you’d taken his words to heart and bought shares in Zoom last year, you’d have almost trebled your money this year. Not bad at all.

    Now that every investment company has its own online platform, it’s easy enough to buy shares directly — including international options — from the comfort of your own home. And with platforms increasingly geared towards smaller investors, you don’t have to buy big into each company either: in some cases, there’s no minimum investment. If you have a hunch about the next Zoom, you can test the waters with just £100.

    It’s worth shopping around to find the right platform for you, not least as the fees and structure vary. If you want to use one place for all of your money, you’ll need a platform that offers plenty of lower-risk mutual funds and a decent Isa option — such as AJ Bell’s YouInvest or Charles Stanley Direct. If you plan to buy and sell shares regularly, you might want to choose one of the newer online options — Freetrade, Stake — that compete on their rock-bottom trading fees. Given these platforms focus on individual assets (i.e. shares and options), you’ll want a more established provider, like those listed above, for your more standard investments.

    Once you’ve done that, it’s time to get stuck in. My own method — observing which companies are thriving in my seaside hometown — has served me well in recent years. If a company can do well in poor old Great Yarmouth, I figure, it can probably survive anywhere (I call it the saguaro strategy, after those cactus plants that thrive in the notoriously harsh Arizona desert). On that basis, I bought Greggs (the best performing FTSE 100 share last year) and Domino’s Pizza (up nearly 30 per cent this year). Sadly, I missed Games Workshop, which has doubled in value ten times in four years.

    If you’re feeling really brave, why not take a punt on a stock that’s just taken a sharp tumble? The American hedge fund manager and former White House communications chief Anthony Scaramucci is currently investing in Las Vegas casinos that have been hammered by the virus. >When he did the same thing after the 2008 financial crisis, he says, he made eight times his money. After all, doesn’t the house always win?

    If you’re looking for depleted stocks, you’ll be spoilt for choice right now. Why not buy into Carnival, the cruise ship operator, that’s lost nearly 70 per cent of its value this year? Its bosses remain bullish on its prospects for next year: if you share their confidence, it might pay for your next holiday. Feeling really bold? Take a look at beleaguered American oil giant Chesapeake, whose shares are worth just 5 per cent of their 2019 high. Yes, it faces the triple threat of plummeting demand, an Opec squeeze and some seriously scary corporate debts, but surely there’s life in the old girl yet?

    Even if your hunch doesn’t pay off, there are advantages to be had — particularly for amateur investors. Firstly, it’s good for your own financial literacy (the plain-language website Investopedia has guides on how to analyse a company’s fundamentals). Secondly, it helps you build a healthier attitude to risk in the long run. It’s better to learn straight away that investments can go up or down, rather than waiting to experience your first big market correction.

    And here’s the clever bit: all things being well, you won’t actually lose anything. Let’s assume the other 97 per cent of your portfolio is intelligently balanced (a spread of reputable ETFs, dividend-paying FTSE giants, some international blue-chips — with the first £20,000 in a tax-advantageous stocks-and-shares Isa), then you should, based on performance from the past decade, be looking at an annual return of between 5 and 15 per cent. In reality, you’re just reinvesting some of those profits in slightly riskier ventures.

    Remember though: there’s a difference between a risky investment and an outright con. If you’re shopping around online, stay clear of something called ‘binary option trading’. The Financial Conduct Authority, which oversees UK investment, currently classifies it as gambling rather than investing (if anything it’s worse — at least casinos don’t charge fees to play roulette). CFDs (Contracts for Difference) aren’t outright gambling, but are notoriously volatile. Tread with caution.

    Provided you’re buying assets through a FCA-regulated platform, you at least know you’re getting something legitimate. They may well be risky, but at least they’ll be genuine. And if it really pays off, you know who to thank.