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Seven Principles of Investment - No.6: Underpin your investment with security

Investors often ask if an investment opportunity is ‘secured’. Their expectation is that if it is, then their investment is protected from loss. We are great believers in bringing security to all investments where it is feasible. In my view, security is a really positive addition, but should not be assumed to offer perfect protection.

Here are a few essential opinions that I hold about the provision of ‘security’.

Any security is better than no security.

A first legal charge over UK property is the best that can be achieved. Provided that valuations are carefully done, and the amount lent is restricted to a maximum of (say) 70% of the value, then an investors capital is probably fully protected.

There are many different types of security, for example:

  • First legal charge over property,
  • second legal charge over property,
  • personal guarantee, corporate guarantee,
  • Debenture over company assets,
  • Charge over other valuable assets like planes, cars, fine art
  • Charges over intellectual property such as patents, royalties, brand names etc.

In general, our experience is that the lower the quality of security, the higher the investment return that is required to attract investors. Judging the risk/return ratio is a key necessity for all investors.

Security may be held by a security trustee on behalf of all investors, or individually by each investor. Each method has pro’s and con’s, we are always willing to explain the detail.

Having security in place does not mean that all your capital and interest due is protected. Maybe all the capital is protected, perhaps a part is protected. But you are unlikely to lose all your capital in the event of business failure. On the other hand, it is equally important to realise that if there is no security in place, it doesn’t automatically mean you would lose all your capital in the event of business failure. You may get back all, some or none of your capital. There is, in my opinion, a higher risk of losing more money if there is no security in place, but for some investments, this may be a risk worth taking!

Sometimes it is the company receiving investment that holds the security. For example, a bridging finance company will usually take property as security from the borrower. Investors who have provided the finance to enable the lending to take place may rely on the protection taken from borrowers as satisfactory.

In other cases, the investment itself is security. For example, if you purchase gold bullion and take physical delivery. ‘Security’ for your investment is the value of the gold. The value may fluctuate, but providing you are not forced to sell, you can pick your time to realise yourinvestment at a profit.

For many investments, including the bulk of regulated investments like shares, there is no security at all! Moving from a ‘no security’ position to one which is better but maybe not perfect, may still be a hugely positive move.

Finally, I return to the beginning and say that having security is far better than having no security. Learning more about security will enable you to make better investment decisions.

Read about all 7 principles of investment by downloading our report. The report equips you with the knowledge of how to improve your chances of success and make the most of your investment portfolio.

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