While few of us have sufficient money or time to pick a well-spread portfolio of shares, we can invest in a ready-made portfolio offered by the life insurance companies, or unit and investment trusts.
Of the main choices available, insurance-linked investments tend to perform worse than unit and investment trusts. The small amounts of life insurance they offer have to be paid for and this means that they tend to carry higher charges, which affect their performance.
With more than 2,000 unit and investment trusts to choose from, it is should be possible to find something that suits any individual's investment criteria, be it growth, income, or a balance of the two. Over the years, these funds have produced better returns for the investor than the building society.
But stock market investment is often high risk. Savers who put their money into the stock market 10 years ago, just before the 1987 crash, typically had to wait years before the value of their investment recovered, let alone showed them any profit.
Timing is crucial with any one-off investment. "Institutional (big City) investors always aim to buy low and sell when prices are high," according to Ann McMeehan, director of communications at the Association of Unit Trusts and Investment Funds (Autif), "while the man in the street tends to wait for euphoria to hit the stock market." To reduce the risk of going into the market at the wrong time, investing a set amount on a regular basis provides the ideal solution. Most unit and investment trusts now offer regular savings plans, starting from as low as pounds 20 a month. These iron out the peaks and troughs in the market. When prices are falling, the regular saver will get more units for his or her money.
Autif's figures show that if pounds 50 a month had been put into the average growth fund over the last 10 years, amounting to a total of pounds 6,000, the saver would now be sitting on an investment worth pounds 10,646. This is considerably more than the pounds 7,665 value if the money had been put into a building society account. Over five years, the pounds 3,000 total investment would be worth some pounds 4,171, 27 per cent more than from the building society.
Personal Equity Plans (PEPs) have provided an even better means of saving for equity investors, providing they are taxpayers. Under the rules, every individual can invest up to pounds 6,000 a year in a general PEP and another pounds 3,000 a year into a single company PEP. All the income or dividends generated by the investment and all the capital gains it makes are free of tax. The money can be invested either on a one-off basis or in regular amounts. The problem for PEPs, however, is that Gordon Brown, the Chancellor, has given notice that in 1999 PEPs will lose some income tax privileges and be superseded by a new savings vehicle.
Of course, the price of share investments can fall as well as rise. Saving regularly will smooth out some of these risks. And for the very cautious, some companies (including Legal & General, 0800 116622, and HSBC 0800 289505)) offer PEPs with money-back guarantees. However, if the market performs well these funds are unlikely to perform as well as other fully- exposed stock market investments.