Benefits of playing the long game

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The Independent Online

Investing for growth in personal finance is precisely the opposite of the famed economic dash for growth. It is about calm, long-term planning and a refusal to panic; there is no dashing to be done. It is almost yogic in its central aim of achieving balance.

Investing for growth in personal finance is precisely the opposite of the famed economic dash for growth. It is about calm, long-term planning and a refusal to panic; there is no dashing to be done. It is almost yogic in its central aim of achieving balance.

And it is all about understanding stock market risks. If you tuck your cash safely under the mattress, you will no doubt sleep soundly, but you won't wake up any richer.

If you are likely to need access to your cash every morning, or indeed at any point in the next couple of years, a stock market investment probably won't be appropriate. A sudden correction risks wiping out much of its value. A postal or telephone account might be preferable and rates of more than 6 per cent are still available. However, with the money in a building society account, safe as houses, history suggests that longer-term growth rates will not match those you could achieve by putting your money into the stock market.

Another area that can be ruled out is bonds. Because they are designed to provide a steady income and explicitly don't grow, corporate or government bonds or fixed income funds are not serious growth investments. So, one way or another, investments for growth usually end up in equities.

Many experts argue that income-producing shares - where the growth is unspectacular but the dividends amount to a tidy sum - are on their way out, and the future is growth. In the 1980s, people were saying the opposite. "Investment markets have always been cyclical," says Nick Fletcher, director of MGP Investment Management. "The message now is, unless you really need the income, you should be investing for growth."

Everybody has different reasons for investing for capital growth. Some are saving for early retirement, others to put a child through school or university, for a car, wedding or to build a nest egg. Whatever the reason, the process is the same: decide how to invest your money, squirrel away the cash on a regular basis, and FORGET ABOUT IT.

"The first question you have to ask is how soon you want to be enjoying any investment returns," according to Jason Hollands of Best Investment. That way you can choose between different types of fund or a pension investment.

The typical growth investor is younger, rather than looking to supplement their retirement income. Most will be financially comfortable, happy to squirrel away the tiny acorns from which the tallest oaks can grow. No amount, regularly invested is too small. Check the minimum requirements of individual trusts.

Diversification is the key to providing steady, long-term growth of your equity portfolio. If you are constantly moving your money in search of the next big sector boom or emerging market, you could possibly get it very wrong, and you will certainly pay a fortune in unnecessary brokers' fees. This sort of highly speculative, short-term cherry- picking is all very exciting, but investing for growth shouldn't really raise your blood pressure. Best Investment advises that investors always maintain a core sum in a highly diversified fund or a diverse set of funds. If you are in for the long haul you don't want to risk putting all your money in a sector that ends up looking a lot less attractive in a few years.

"For first-time investors, it is best not to try and cherry-pick a specialist sector. No one has a crystal ball to the future, so you should spread your risk," said Mr Hollands. "It is best to pick a general fund, as diversified as possible."

The best age to start investing for growth, of course, is before you are out of nappies. For parents looking to invest on behalf of their children, some of the best deals can be found at the friendly societies, where you can stash cash tax-efficiently. But you should shop around before deciding. Many societies offer a relatively safe with-profits savings plan, a stock market investment that holds back some gains from the good years to top up the bad years. Some also offer a plan more directly linked to stock market investments, which may be more volatile but has historically tended to yield better results over the long-term.

Outside of the friendly societies, you could pick any growth fund or unit trust. A handful are particularly tailored for saving on behalf of children. For instance, beneficiaries of Invesco's Rupert Children's Fund get Rupert the Bear toys and presents. Not that these should sway your investment judgement.

Putting the child's name in brackets after your own on documents effectively means you are holding the investment in trust until they come of age. Robin Seccombe of Hawthorn Fund Management said savings plans and investments could be chosen with a specific purpose in mind - helping your child through university or as a deposit for their first house - or simply to give them a lump sum on their 18th birthday. "I'm doing [a savings plan] now for a baby that was born last week," he said. "But I also started one for my son three years ago, and he is now 16. My thinking was that when he is 24 and wants to buy a house, he will have something that will help with that."

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