Stockmarkets may be buoyant again but investors still face volatility. Director shows you how to make the most of your wealth in uncertain times

Andrew della Casa, director of the Wine Investment Fund, is a happy man. At the end of last year, a case of 2000 vintage Château Lafite was worth £8,150. By the end of August, the price had climbed to £12,400 and looked likely to head higher. That's bad news for wine connoisseurs, but good news for investors. It's also a timely reminder that when markets are volatile, it can be worth looking at alternative asset classes for gains.

"Despite some good months in equity markets, fine wine has remained a strong performer since the start of the year, as it has been historically over the decades," notes della Casa. "Prices were up between 10 per cent and 13 per cent in the first eight months of 2009. But importantly this return has been achieved with little volatility—seven of the eight months saw positive returns, with just one small negative month of minus one per cent in March."

In uncertain times, investors flock to safe havens, but for most directors wine will remain a tipple rather than an investment. Investors in della Casa's fund could reap good returns but must tie up their money for five years.

Even so, the wine investment story highlights the fact that when market conditions are rough, an investment that delivers steady returns is preferable to a rollercoaster ride from riches to penury. It's not surprising that many investors feel shellshocked after the events of the past 15 months. In 2008, the FTSE 100 index slumped 30 per cent. And even though stockmarkets around the world are looking healthier, there is still debate about whether the rally can be maintained. So what should investors do?

There are no easy answers. "It is difficult to know which analysts to believe as predictions vary every day, ranging from recovery to a double-dip recession and from deflation to inflation," says Tim Gregory, a partner in the private wealth group at accountants Saffery Champness. "But whichever way the economy develops, people need to be aware that volatile conditions can represent an opportunity as well as a threat. For instance, now might be the ideal time to gift to the next generation while your assets' valuations are low and hence the tax consequences of gifts, such as capital gains tax (CGT) or inheritance tax (IHT), will be lowered accordingly. The same applies to most other forms of restructuring."

"Actually it is pretty easy to make money in volatile markets—just pick out all the risky stuff and you can make a small fortune," says Gary Reynolds, director and chief investment officer at Courtiers, a wealth management firm.

"In volatile markets, investors are often tempted by structured products that provide guarantees when, in fact, they should avoid these because the cost of these guarantees rises, which makes the contracts expensive. This is because increased volatility drives up the price of options," he explains.

"The people who make money in volatile markets are the ones that
can keep their nerve, buy on good fundamentals and sit out the rollercoaster ride as prices fluctuate wildly. Fear panics investors into selling, which depresses demand for shares and the classic supply/demand relationship drives prices below their intrinsic level."

When investment conditions become difficult, it makes sense to go back to first principles and look for a strategy that protects the downside while offering hope of some gains. One of the world's top investment gurus is Harry Markowitz, a Nobel Prize-winning economist. For most of his life, Markowitz has worked on refining a theory that helps investors to define and manage the level of risk they want in their portfolios.

The heart of his theory is that investors can best control risk in their portfolios by choosing investments that have historically delivered above-average returns but below-average volatility. His method applies to whatever asset classes or level of overall risk an investor is prepared to tolerate. But it means that investors must manage their portfolios more actively.

They need to decide at the outset what level of risk is desired. Land and residential property are still safe long-term investments, according to some advisers. But the more adventurous might want to consider investing in growing businesses that are looking for capital while the bank loan drought continues. There are tax-efficient schemes, such as the Enterprise Investment Scheme and the Venture Capital Trust, which can make direct investment in businesses more attractive.

Another UK guru who also believes in active portfolio management is Stephen Sutherland, author of Liquid Millionaire. Sutherland has developed an investment strategy he calls ISA trend investing. "You trade investment funds, not stocks, using an ISA, a SIPP or both," he explains. "The key is to invest in the best investment funds you can find but only when the market is healthy. When it's unhealthy, you stay in a cash-based fund to protect potential downside losses."

Timing is crucial in Sutherland's approach. "Many people mistakenly think that it is all about choosing the best investment fund to park your money in. While finding a high-quality fund is important, it's not as important as getting in sync with market trend," he says.

Directors who want a more active role in managing investments must decide whether to take time to do it themselves or to hand the day-to-day work to an adviser. "If an individual is capable of managing their own investments, the only reason they would hire someone else would be if a professional can do it better for a cost-effective price," says Gregory at Saffery Champness.

"In this case, the only factor that really matters is performance. Investors will need to be careful in selecting assessment criteria as past performance is no indication of future performance. It comes down to whether the people you deal with inspire confidence."