Investing For Growth: Equities remain long-term gamble

THE OLD SAW that the value of a share can rise as well as fall has never been as apparent as in the past few months.

Share prices have fallen and risen wildly, often in the space of a week, leaving many investors, large or small, unsure as to whether now is the right time to plough more of their hard-earned cash into the stock market.

Of course, we can all agree that over a long period of time it makes sense to invest in equities. But for many, there is still that fear of a looming stock market crash to hold us back.

After all, what happens if you invest on a Monday and by Friday the value of your holding has gone down by 10 per cent.

To take that argument further, if the markets really are so volatile at the moment, wouldn't it make sense to hold off for a few months more rather than pump money into equities immediately?

There are a number of issues to look at here. First, it is important to understand what kind of risk you are running when investing in equities.

There is "specific" risk involved in taking a risk with an individual company. Clearly, if you pick the wrong one to buy shares in and it turns out to be badly run, or the sector it operates in is going through a lean spell, then the company's share price may fall.

This is why it almost always makes sense to invest in a portfolio of shares, so that any risk may be spread out.

Alternatively, pooled funds, such as unit trusts or investment trusts, achieve the same effect, placing your money with that of many thousands of other investors.

The money buys shares in hundreds of companies, so that if one or two go belly-up, the fund itself won't be too badly hit. There is also "market" risk to bear in mind. This is where no matter how many otherwise sound companies you invest in, you will be clobbered by a "bear market".

This is where there are more buyers than sellers of equities: the options here are usually either to hang in there and wait for the market to recover, or sell at a loss.

There is a third option too: that of seeing that a fall also offers a buying opportunity. The lower prices are, the higher they will rise when a recovery occurs.

Of course, a canny investor might prefer to wait until the moment when the market has fallen to its lowest point before entering the market. Does this make sense?

In theory, it does. The problem lies in picking the exact moment to invest. Fidelity, the large US fund management group, carried out research on the period between the end of December 1986 and the end of December 1997, an 11-year period.

Fidelity's research over the period shows that the FTSE All Share index delivered annualised returns of 14.8 per cent.

But if you had missed out the 10 best days' growth over those 11 years, the annualised growth would have been 10.7 per cent.

Missing out on the best 40 days over the same 11 years would have delivered returns of just 5.2 per cent.

In other words, investment performance, while positive over the period, rose in a series of spurts.

Missing out on an average of less than four days' growth a year would have cut the average annual performance to almost one third.

A canny investor might agree with this but still hopes to get the investment period right. Again, Fidelity's researchers looked at the performance of the MSCI index (another way of measuring share prices) between the end of 1969 and 31 December 1997.

The study was based on three hypothetical investments made on the same day each year - at the highest point in the market (suggesting a poor investment strategy), at the low point (a "good" strategy) and at the arbitrary investment date of 1 January each year (how most of us are likely to invest).

At the end of this 27-year investment period, researchers calculated the annualised returns on each investment date.

Here are the returns: high point, 15.12 per cent; low point, 17.12 per cent; 1 January, 16.38 per cent.

While there is a difference in returns, it is not as significant as one might assume - and it is based on getting the investment timing exactly right every year, an unlikely scenario. There is, however, one way of minimising potential losses and enhancing gains.

Making regular investments offers the potential for "pound cost averaging". This means that if you buy into equities as their price is falling, you will receive more of them. In turn, gains that individual funds make will become magnified.

Here, despite the fact that share prices rose by 15 per cent in 12 months, the increase in the value of the fund was more than 25 per cent.

The message to take home is that for most of us, average investors, there is rarely a "right" time to invest. What we can hope for, however is that over a long period of time any sharp downward corrections can even themselves out.

And if prices are falling, then it makes very good sense to buy into a downturn.

`The Independent' has published a Guide to PEPs, which examines in detail the arguments about investing for growth or income.

For your free copy of copy of the guide, sponsored by Scottish Widows Fund Management, call 0345 678910.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

As in 1942, Germany must show restraint over Greece

As in 1942, Germany must show restraint over Greece

Mussolini tried to warn his ally of the danger of bringing the country to its knees. So should we, says Patrick Cockburn
Britain's widening poverty gap should be causing outrage at the start of the election campaign

The short stroll that should be our walk of shame

Courting the global elite has failed to benefit Britain, as the vast disparity in wealth on display in the capital shows
Homeless Veterans appeal: The rise of the working poor: when having a job cannot prevent poverty

Homeless Veterans appeal

The rise of the working poor: when having a job cannot prevent poverty
Prince Charles the saviour of the nation? A new book highlights concerns about how political he will be when he eventually becomes king

Prince Charles the saviour of the nation?

A new book highlights concerns about how political he will be when he eventually becomes king
How books can defeat Isis: Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad

How books can defeat Isis

Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
Judith Hackitt: The myths of elf 'n' safety

Judith Hackitt: The myths of elf 'n' safety

She may be in charge of minimising our risks of injury, but the chair of the Health and Safety Executive still wants children to be able to hurt themselves
The open loathing between Barack Obama and Benjamin Netanyahu just got worse

The open loathing between Obama and Netanyahu just got worse

The Israeli PM's relationship with the Obama has always been chilly, but going over the President's head on Iran will do him no favours, says Rupert Cornwell
French chefs get 'le huff' as nation slips down global cuisine rankings

French chefs get 'le huff' as nation slips down global cuisine rankings

Fury at British best restaurants survey sees French magazine produce a rival list
Star choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells

Young carers to make dance debut

What happened when superstar choreographer Matthew Bourne encouraged 27 teenage carers to think about themselves for once?
Design Council's 70th anniversary: Four of the most intriguing prototypes from Ones to Watch

Design Council's 70th anniversary

Four of the most intriguing prototypes from Ones to Watch
Dame Harriet Walter: The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment

Dame Harriet Walter interview

The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment
Art should not be a slave to the ideas driving it

Art should not be a slave to the ideas driving it

Critics of Tom Stoppard's new play seem to agree that cerebral can never trump character, says DJ Taylor
Bill Granger recipes: Our chef's winter salads will make you feel energised through February

Bill Granger's winter salads

Salads aren't just a bit on the side, says our chef - their crunch, colour and natural goodness are perfect for a midwinter pick-me-up
England vs Wales: Cool head George Ford ready to put out dragon fire

George Ford: Cool head ready to put out dragon fire

No 10’s calmness under pressure will be key for England in Cardiff
Michael Calvin: Time for Old Firm to put aside bigotry and forge new links

Michael Calvin's Last Word

Time for Old Firm to put aside bigotry and forge new links