That acronym ISA is everywhere again. This blog is to remind you of the basics (not the detail) and to give pointers to 3 categories of investor:

• those who think ISA’s are "safe".

• those who wish to save safely but are not happy with the current rates of cash deposit returns.

• those who know ISA’s might not be "safe", who want to invest anyway but are wondering what to do.

Scarily, I have come across many people who have assumed that all ISA’s have some form of government protection, leading to them investing in more risky areas than they thought, such as equities. For all those first timers you need to know there are two types of ISA’s.

1. Cash or deposit ISA’s – having some protection from the Government Deposit Protection Scheme
2. Market linked or equity ISA’s which are risky and may result in you losing a little or a lot of your capital.

They may also give you a good profit but make sure you are clear about which type of ISA you are investing in

Very briefly, the maximum cash ISA allowance this year is £5,340 and £10,680 for an “investment” ISA – in other words in to the stock market.

There is plenty of information on the internet to help you find a cash ISA account but remember the basics and keep an eye on your investment. Many banks have a history of quietly reducing your “best rate” over time. Check also what ordinary non-ISA accounts will give you, especially if you are a zero rate tax payer, as non-ISA rates can sometimes be better for you.

If you are happy to tie your savings up for five years, have a think about the following concept.

Readers might be aware that under the Deposit Protection Scheme the first £85,000 you have invested with any one bank is protected by the government. The problem with cash ISA’s is the low return. So how about considering an “investment” with a bank, that is similarly protected by the Deposit Protection Scheme?

What’s the catch? The invested amount is tied up for 5 years and you may only receive back 100% of the cash you invested.

Why would you do this? Because, through the Deposit Protection Scheme, you are guaranteed the return of your monies and you might get a better return over the next five years.

Obviously no one knows what the future holds but examples of different investment managements past performance have looked like this

So the proposal from just one of the UK banks is either: we will give you your money back in five years OR you might benefit from these types of returns if the investment managers keep performing

By talking to your IFA (or perhaps give us a call) you should find alternative products to either cash or shares/equities (this is just one concept) that might take your interest. Just talk to your adviser.

The above sample investment concept is a lower risk investment to saving your funds directly into equities. Food for thought. If you wish to invest into equities and go for growth and immediate access of funds, unless you are your own researcher, I suggest you take independent financial advice from an IFA, such as us. You can find us at www.buildyourwealth.co.uk. From the free guides page you can sign up for our latest guide to investing with guarantees. Though published in June 2011 the principles still apply.

As ever, I remind you that these comments are designed to spark discussion – a bit like the daily papers – and do not constitute advice in any form. Please seek advice from an IFA and benefit from their experience, licensing and indemnity insurance protection, alongside those protection benefits of the Financial Services Compensation Scheme (FSCS).

I have just posted summaries of how each of the three DIY investment strategies performed over the 2011 calendar year. The latter half of November and December saw the worst period for all three strategies since inception on 23^rd January 2010. Isonomy Turbo saw the worst of it, but such occasional drawdowns (drawdown = losing period) are not unexpected, especially so for Isonomy Turbo as it is the most volatile strategy of the three.

There were two main factors combining together to drag down performance towards the end of the year:

1. 1. Falling Implied Volatility, which reduces options prices. Strategies that hold options (Plus and Turbo) lose money when IV goes down. This factor affected Isonomy Turbo the worst but had no effect on plain Isonomy.
2. 2. Rapid fall in the price of gold and silver. This affected all three strategies.

Nevertheless all three finished the year with a decent gain, which is more than can be said of the majority of investment funds!

Click here for the Isonomy 2011 summary.

Click here for the Isonomy Plus 2011 summary.

Click here for the Isonomy Turbo 2012 summary.

Dean.

• • The growth (or decline) over 2011, from beginning of January 2011 to end of December 2011
• • The total growth since inception, from the start date 23^rd January 2010
• • The best growth over any 12 month period, in other words the best profit you could have possibly made by investing and encashing over the best 12 month period
• • The worst growth over any 12 month period, in other words the worst profit or loss you could have possibly made by investing and encashing over the worst 12 month period
• • The worst loss (otherwise known as max drawdown) since inception, in other words the worst amount you could have possibly lost in any period by investing and encashing at the absolutely wrong times

• • The growth (or decline) over 2011, from beginning of January 2011 to end of December 2011
• • The total growth since inception, from the start date 23^rd January 2010
• • The best growth over any 12 month period, in other words the best profit you could have possibly made by investing and encashing over the best 12 month period
• • The worst growth over any 12 month period, in other words the worst profit or loss you could have possibly made by investing and encashing over the worst 12 month period
• • The worst loss (otherwise known as max drawdown) since inception, in other words the worst amount you could have possibly lost in any period by investing and encashing at the absolutely wrong times

• • The growth (or decline) over 2011, from beginning of January 2011 to end of December 2011
• • The total growth since inception, from the start date 23^rd January 2010
• • The best growth over any 12 month period, in other words the best profit you could have possibly made by investing and encashing over the best 12 month period
• • The worst growth over any 12 month period, in other words the worst profit or loss you could have possibly made by investing and encashing over the worst 12 month period
• • The worst loss (otherwise known as max drawdown) since inception, in other words the worst amount you could have possibly lost in any period by investing and encashing at the absolutely wrong times

The following statements may sound simple but they are achievable goals, whether you are counting the pennies or wondering how best to manage a multi million estate

• You can invest with capital guarantees.
• You can protect the assets you have for your beneficiaries and help make sure they do not lose them.
• You can insure against bad things happening, be that your health or your wealth.
• There are some healthy investments in the UK, pre-approved by HMRC that also attract significant tax breaks.

I understand blogs are supposed to be educational and all that, but thought I would give a Xmas plug for all of us Independent Advisers and maybe someone will read this and think "I would like to know I am achieving these goals with my money" and call us for a chat. There are good independent advisers out there with the experience to recognise and help you achieve the above financial health and wealth goals. I encourage you to talk to a few.

And if you find a few quiet moments over the holiday, do have a look through our latest newsletter

A Happy Festive period to you all.

Again I remind you that these comments are designed to spark discussion – a bit like the daily papers – and do not constitute advice in any form. You can find us at www.buildyourwealth.co.uk

Build Your Wealth Ltd is authorised and regulated by the Financial Services Authority. Registered in England No. 04557482

Confusion…

…and mystique surrounds options (and other financial derivatives) even though there is a wealth of information easily found on the Web and in books. But somehow these exaplantions don't cut it for some people. In my correspondence with traders of my strategies (those who have subscribed to receive the real-time trading signals via Collective2) I have on occasion found myself having to explain the very basics yet again to people worrying about the wrong things.

Since my strategies make use of options I will write a series of articles here about them, in a slightly different way which hopefully will show that they are not as mysterious as many think.

In fact, the principles of "high finance" are not really that complicated; it just has a reputation for being so. A good grounding in, and/or feel for, a hard science helps a lot. But just logic and common sense go a long way on their own! Of course, basic principles can be put together in complicated ways – see the title picture above – but that applies to almost anything in life. 

First let me dispel a major myth: trading 'derivatives' is very dangerous. You are gambling if you buy and sell futures or options or CFDs or whatever… "whatever" being quite apt as these complicated things are so complicated only a few wizzos in the City and Wall Street can even begin to understand them.

WRONG, this is not true!

As I said, I will just talk about options in the following articles, but much of the basic logic applies to other derivatives as well.

A derivative is called a "derivative" because it is not real on its own – its properties derive from something 'real' such as a lump of gold or a barrel of oil or ownership of a company (i.e. shares) or a house or whatever. A derivative is just a contract. The details of that contract between two people (or organisations) are what make it an 'option' or a 'future' or 'Contract For Difference' etc.

Think of any contract: Mr Wright writes a contract in which he promises something (within reason; he must be in a position to honour his promise) and then sells it to Mr Buyer who pays Mr Wright for his promise. In the financial markets many of these contracts are completely standardised and regulated so that Mr Wright doesn't have to think about what to write – he simply picks the contract he wants and then he and Mr Buyer sign their names. This standard type of contract is what the Isonomy series of strategies make use of.

So far so simple.

Doesn't sound dangerous, does it? Well, the perception of danger comes from:

1) The fact that when large institutions misuse derivative contracts it makes the headlines.

2) When ordinary people first learn of their existence they tend to use them for the purpose of gambling; greed and hope take the place of logic and common sense. Invariably this leads to losing money – it's the casino that wins in the long haul.

3) The people (and institutions) who use derivatives sensibly never get publicity – they don't get rich quick or collapse in scandal and shame, and so their story is too boring to report or pay attention to.

Put another way, are cars dangerous? Well, if you drive like a maniac without practice then definitely yes! But if you drive sensibly then it is a very useful thing.

Needless to say, the Isonomy strategies are very firmly in camp (3) above!

In the next article I will go into some detail about what an option contract is and will explain it (I hope) in such a way that you will get it even if at the moment your brain goes completely blank whenever "option" or "derivative" or "financial" is mentioned leaving behind just a sense of dread at getting involved, and disgust at how the dirty capitalists are taking from the poor to give to themselves

Dean.

I am really talking here about Critical Illness protection and, more generally, Income and Disability protection.

So why bother buying such protection?

Well, one reason is there is a better chance of a payout against winning the Lottery Jackpot. A second reason is that with such protection, you are guaranteed some cash when you most need it.

Seriously, the main reason for protecting yourself in this way is simply that you wish to look after yourself and your family and maybe your business. Cover is relatively cheap and an important part of the jigsaw of financial planning.

Critical Illness, Life Insurance, Income Replacement – how much cover?

It all depends on your view. If you are rich, the answer might be ZERO – if your view is that you are happy to lose capital and income should you die prematurely, contract a critical illness or be unable to work .

You might simply wish to ensure that mortgages are repaid and funds are available for you and others if you were to die prematurely, contract a critical illness or be unable to work.

Then there is the issue of affordability. One way to assess this could be to work out how much is spent on other areas e.g fun, lottery tickets (!) and consider against this sum how important cover might be to you. Then find an IFA and work out what cover might be purchased.

Is it worth it? Will the policies pay out?

Yes. And yes, all the good ones pay out millions every month – to the people who have cover that is.

Am I the unlucky one who will not receive a pay out ?

You would be lucky if they DID NOT HAVE to pay out. Seriously though, with 59% of UK adults not having critical illness cover and 1 in 3 of us contracting cancer alongside 1 in 6 of us having a stroke, without doing the maths I would suggest many of us will claim but most of us will be in a position whereby we wish we could have claimed. And by talking with an IFA and utilising their knowledge of insurance companies and policies available you are increasing your chances of having the right cover with a reputable insurance company in place, should you ever be unlucky enough to need it.

So what to do?

Find an IFA, perhaps us, and have a conversation about making sure the right money will be in the right hands at the right time should you die, have a critical illness or be unable to work.

Or buy a lot more lottery tickets!

Again I remind you that these comments are designed to spark discussion – a bit like the daily papers – and do not constitute advice in any form. You can find us at www.buildyourwealth.co.uk

Build Your Wealth Ltd is authorised and regulated by the Financial Services Authority. Registered in England No. 04557482

Having made some money as the price of gold rose strongly earlier in the year, we were no longer positioned to benefit significantly from further rises. Since the kind of options we maintain work best when they are not too far from the prevailing price of gold, we had to adjust our position upwards. Doing that increased our risk so we hedged by buying some insurance which pays out if the price of gold falls.

The trades

Isonomy Plus made the following three trades in August:

1a) Buy-To-Close 1 GLD December 2011 $145 put option.

'GLD' is the symbol of the SPDR Gold Trust exchange traded fund that invests in gold.  It is a way of investing in gold without having to by the physical metal and finding somewhere to store it safely. The fund does that for you!

What we did here was to buy back an option contract that we sold some months ago. We sold the option which has a strike price of $145 when the price of GLD stock was around that same level so we got quite a good price for it. By August the price of gold (and hence GLD too) had risen way above that level so we could buy the contract back early for less – this is a form of “sell high, buy low” instead of the more usual “buy low, sell high” that traders aim for. I say ‘early’ because it expires in December so we could just have waited until then, at which point it would become void and we no longer have to buy it back. But closing early means we can go ahead and make a new trade instead.

See here where some terminology is explained.

1b) Sell-To-Open 1 GLD December 2011 $185 put option.

Having closed our position at the $145 strike, we were free to open a new similar position at the higher strike of $185. This new trade was to write a new contract with a $185 strike price and sell it for cash; hence "Sell To Open". We got some money up-front again for this contract, essentially doing the same as we had months ago when selling the $145 contract which was closed in trade 1a.

A short hand way of describing this pair trade is to say that "we rolled the GLD put contract upwards in strike price".

Simplified result: This pair of trades generates a profit if the price of gold stays the same or goes up. It results in loss if gold goes down.  In order to limit the risk should the price of gold fall over the next six months or so, we added the third trade below.

2) Buy-To-Open 1 GLD January 2013 $160 put option.

We bought a new put option contract to balance (or ‘hedge’) the one we sold in trade 1b. This is our insurance: if GLD goes down a lot, the put at $185 strike which we sold in trade 1b will go up in price and so we will eventually have to buy it back at more than what we sold it for; i.e. we make a loss of the trade. However, our $160 put which we bought will also go up in price so we make a profit in this one.

Simplified result: This trade generates a profit if the price of gold goes down but it results in a loss if gold stays the same or rises. Trade 2 can be interpreted as buying 'insurance' since we lose money (pay a premium) if gold does not fall, but we make money (i.e. the insurance pays out to us) if gold falls.

Wrapping up

This is all a part of my investment strategy.  As far as performance is concerned, I refer you to my last performance summary post. For more detail please see here and follow the individual strategy links there.

I hope you enjoy following this investment strategy and if anyone wants to contact me, please feel free to post a comment below or get in touch via BYW.

Regards,
Dean.

Pension Annuities

This article written by Billy Burrows from the insurance company MGM shares some sensible thoughts for those deciding whether to buy an annuity. My suggestion is to go through all your options with an experienced adviser. If having done this you conclude to buy any form of guaranteed annuity, then go ahead and BUY IT NOW.

Stocks, Shares, Bonds and Investment Portfolios

If you have any of these, you should have been told they would go down as well as up in value. Guess what; this is a down. Now you need to ride the storm as originally planned, although you might want to have a chat with your adviser to double check matters of investment risk and future planning.

If you are nervous, perhaps consider educating yourself on how to invest with guarantees by asking us for a copy of our guide to Capital Protected Investing, put together to let people know they can invest and be assured of the return of the funds invested. These ideas might suit nervous investors or holders of cash who want to try something to make their savings grow. Obviously, you should take advice, perhaps by having a chat with us.

To do this Go to www.buildyourwealth.co.uk. Once there, request a copy of our Capital Protected Investing guide. Read it, noting any questions it raises. Contact us on 02380 457889 to talk through your questions. If we get along, consider meeting and engaging our services

Aiming to Make a Profit

Stay cool and go see your adviser – there are better buy deals today than there were a few weeks ago and there will be opportunities for low and high risk investors.

Again I remind you that these comments are designed to spark discussion – a bit like the daily papers – and do not constitute advice in any form.Build Your Wealth Ltd is authorised and regulated by the Financial Services Authority. Registered in England No. 04557482