Personal Finance: `Traditional ways of valuing shares have been thrown out of the window'

Click to follow
Indy Lifestyle Online
YOU KNOW that feeling when you're walking along a cold, rainy street late at night and you hear the sounds of revelry from a house where a lively party is obviously taking place.

You have an urge to rush up to the front door and join in the fun. Another side of you says this could lead to one hell of a hangover - and tomorrow's a working day.

So, should you join in the current Internet share-buying frenzy (see page one)? Having spent the last week talking to brokers and regulators caught up in this wave of buying, I am torn.

It is pretty certain the unprecedented surge in private share buying will continue at least beyond the New Year. The big City institutions appear keen to get in on the action, adding further upward momentum to the market.

Investing leviathans and pounds 100-a-go minnows seem to agree that anything with an "e-" on the beginning or a ".com" on the end should be snapped up.

Traditional ways of valuing shares have been thrown out of the window. Brokers are seeing the development of a "two tier" market, where boring old stocks languish while anything hi-tech goes through the roof. The justification is that the Internet is creating a "new economy", and if you don't stake your claim right at the beginning, you'll be left in the cold.

A consensus seems to be forming among investment professionals that if the millennium bug fails to bring the end of civilisation as we know it, everyone will be so relieved that a new surge of buying will hit the markets. This will inflate the bubble even further, giving you the perfect opportunity to sell your shares in the spring, just before the whole thing goes phut. All bubbles go phut in the end. My bet is April or May. Whatever you do, never put money into shares you can't afford to lose. All equity investment is inherently risky, and internet stocks are riskier than most.

On a far duller subject, endowment mortgages have been growing in unpopularity for some years now (see this page). The high inflation which made them attractive in the 1980s has passed into history. But people have reacted in the wrong way to the recent warnings about endowments.

A month ago the Institute of Actuaries warned that a significant proportion of endowments would fail to pay off the mortgages they cover. Financial advisers say many endowment holders reacted by trying to cash in or sell endowments. This is the opposite of what they should be doing - they should hang onto their endowment until its maturity. The real growth in such a policy comes towards the end of its life. Cashing an endowment in early is a disaster in investment terms.

People don't realise that they can run their endowment policy entirely separately of a new, repayment mortgage. The endowment can then be treated as a glorified savings scheme.

This lack of understanding - and the resulting rush by homeowners to cash in or sell their endowments - is an indictment of the personal financial services industry. And of personal finance journalists, of course.

j.willcock@independent.co.uk

Comments