But many consumers are also small shareholders. What, some commentators ask, about the effect of a windfall tax on the value of those shares? Won't small shareholders be badly hit?
In fact, this raises important issues about the side-effects of privatisation. Why do so many people hold small parcels of shares? And why have they failed to acquire a sensible spread of investments?
No competent stockbrokerwould advise someone to invest a few hundred pounds in the shares of just one or two companies if their only assets were a couple of thousand. It goes against all the rules of sensible investment.
Yet many small shareholders ignore the rules. In the event, generally they have enjoyed excellent returns from investments in privatised companies.
But along the way they could also have built up a haphazard collection of investments, a few shares here, a unit trust the bank hyped there. And, of course, there's the deposit in a Tessa account - it's tax-free, so must be a good thing.
Maybe these random forays into saving and investment will do no harm. But the person who wants to take a more careful approach to the management of his or her assets would do well to consider the buzzwords used by the professionals, such as "balanced portfolio" and "asset allocation".
A balanced portfolio of investments is one which aims to maximise the return while spreading the risk. The idea is to reduce the risks to your overall wealth from one poor performer. It should allow some investment in potentially high-return investments without causing sleepless nights. At the same time it should take account of the specific investment objectives set by the investor.
A portfolio that is right for one investor may not be for another. Consider someone whose total assets consist of pounds 60,000 in building society accounts. He could almost certainly achieve better long-term returns. So some diversification - perhaps into unit trusts or even individual shares - might seem to be worthwhile. But the investor may be very cautious. Or that pounds 60,000 could be earmarked for some specific expenditure in the not too distant future. In either case, the right sort of building society accounts could still be the best place to store that pounds 60,000 of unused wealth.
Or consider a different case: someone on the point of retirement who has no significant savings but can look forward to a modest company pension and a nice lump sum from the pension scheme. Shame on any adviser who suggests investment trusts specialising in the roller-coaster stock markets of Latin America and the Far East. That would almost certainly fail to meet the needs and requirements of the individual investor. Instead of some reliable enhancement of income, the investor would be risking serious losses.
The problem is that the great majority of people are still relatively unsophisticated when it comes to matters financial, and this is hardly surprising. The times when serious financial decisions have to be taken are fairly infrequent, so it's easy to rely on the experts.
But financial knowledge is financial power. Before considering the basics for developing an investment portfolio, look first at the essentials of general financial planning:
q Do you have a large mortgage or other debts? With even the lowest interest rates quite high, getting rid of debts is a good place for spare cash. The "return" from paying less interest may well be greater than the net (after-tax) return from investing the money.
q Make sure you are putting sufficient funds into an employer's pension scheme, using a top-up plan for additional voluntary contributions if necessary, or a personal pension plan.
q Take account of your insurance needs, including life insurance and so-called permanent health insurance, which provides replacement income if you can't work because of ill-health.
q Keep sufficient cash on deposit to which you have easy access for unexpected expenditure.
q Consider whether your current job and income are secure. If there's any doubt, start building up some cash reserves.
After that lot, any spare money can go into a portfolio of investments. Investment strategies are down to an individual's temperament and needs. There are four main points to consider:
q Broad objectives: Do you want to maximise income now? Can you settle for a lower initial income with the prospect of both the income and the value of your capital rising? Or do you want to concentrate on building up the value of assets through long-term growth?
q The time factor: When will you need to cash in investments in order to spend the money? You may have specific objectives - for example, to pay school fees or to build up capital to launch a business. For money you need in five years or less, cash and low risk investments are best. But for the medium to longer term, share-based investments should produce the better returns.
q The risk/ reward ratio: How much risk are you prepared to take? The best returns come from higher-risk investments - but the risk is that you could actually lose money.
q Tax: What is your tax position? What are the options to invest tax- efficiently? How can you achieve the best net (after tax) returns consistent with your objectives, timescale and willingness to take risks?
In practice, the typical investor will have a mixture of needs for income and growth and will be prepared to take a higher risk with at least some assets. That's where building up an appropriate portfolio of investments becomes relevant.
Next week we'll consider the differing risk and reward characteristics of the main types of investment.Reuse content