It's been six months since I showed readers how to set up their own hedge fund.
A fund to make the most of a rising stock market, yet able to weather a storm should stock markets come crashing down. At the same time, my aim was to return a decent income no matter what.
Now, even I've been surprised by the success of my hedge fund. And this has taught me a personal lesson that I'd like to tell you about today… This has been a wonderful lesson – remember the fable of the tortoise and the hare?
Let's see how we got on
To get exposure to stocks, I suggested we buy an investment trust. The Perpetual Income and Growth trust is as good as any other. Six months ago, you could buy shares in Perpetual's Income and Growth trust through your regular stockbroker for £2.71.
But I suggested we buy Perpetual's subscription shares for 45p instead. Basically, these shares can be converted into shares of the investment trust in August 2013 for £2.19. With this investment we'd have most of the upside of the investment trust. If the market went up (as it did), we'd get the benefit. BUT crucially, we'd only have to stump up 45p, not the £2.71 you'd have to pay for the fully fledged shares.
That meant that if the market suffered a precipitous fall over the coming year, all we had at stake was 45p. If the worst came to the worst, we weren't obliged to convert the subscription shares into fully fledged shares in the investment trust. And we still aren't!
Now, as we all know, the market has been on fire.
Today, Perpetual's investment trust shares trade at £3.05 – that is, up over 10%. And we've captured that upside swing through the subscription shares. The subscription shares are now worth 75p – remember, that's up from 45p!
But as a hedge fund, we were being a little cleverer than just playing the upside of the stock market while limiting downside risk.
Having only shelled out 45p per share (rather than £2.71), I said we should find a home for the remainder of our cash – a home with a decent income...
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The other side of the hedge
So, we'd put 17% of our fund into the subscription shares (45p/£2.71 = 17%) and the remaining 83% into a home for income.
Now, I said that more cautious investors could leave the cash on deposit earning something like 2 or 3%.
But because we were a hedge fund, I suggested taking on a bit more risk. I plumped for some Enterprise Inns bonds yielding around 8%...
And by Jove, have they done well!
We bought the bonds at 82.5p. Yet today you'll get 98p for them. That's a 19% capital uplift– PLUS the running yield of 8%. And that's been in just six months!
The tortoise and the hare
The more I consider investing, the more I see it in terms of the fable of the tortoise and the hare.
The strategy I've just outlined was designed to reduce risk. I was concerned there could be an equity blow-up. I wanted all the upside of the stock market, but limit my downside.
And yet this tortoise-like strategy has actually ended up making far better gains than the riskier, hare-like strategy of punting the lot on equities in the first place.
Ultimately, the success of the strategy came down to the fact that over the last six months, many investors have chosen the path of the tortoise. That is, they've become risk averse and bought up every bond in sight.
Now, isn't it interesting that equities have had a fantastic run, just at the point when so many have turned to bonds!
As I said last week, I've been in the investment game practically all of my life. I've made all the mistakes you can make. Yes, I've made serious cash on the hares. But I've probably lost just as much on get-rich-quick stocks.
As I enter middle-age, I've come to recognise the beauty of the tortoise.
Over the long run, getting rich slow is the best approach.
For anyone still wanting to capture the upside of the stock market, but limit downside exposure, you can still buy Perpetual's Income and Growth subscription shares. And if you want a tonne more great 'get rich slow' investment tips, take a gander at this report. The service has been helping readers accumulate wealth since 1938.
That's the real thought for the day – 'get rich slow'. As I've just shown, boring old bonds and financial instruments that lower risk can win the race.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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