Investing for growth: Shares always bounce back
Slumps and slides may scare you, but equities are proven winners over time, says David Prosser
The key words here, of course, are "long term". From time to time, equity investors get their fingers badly burnt. Stock market crashes and company bankruptcies do happen. And stock markets do go through periods when share prices fail to excite. It is perfectly possible that you will lose money at times, on paper at least, if you hold equities.
Nevertheless, the numbers show that investing in equities makes sense for growth-hungry investors, as long as you are prepared to be patient. Figures from BZW, the investment banking arm of Barclays, show that pounds 100 invested in shares in December 1918 would have been worth pounds 710,500 by December 1996.
On the other hand, a pounds 100 investment in gilts in 1918 would have been worth just pounds 8,900 by last year. And had the pounds 100 been put into a deposit account at a building society, it would have grown to a relatively piddling pounds 6,100 by December 1996. No other mainstream asset (and that includes property) has come near to equities in growth terms over the last 80 years.
It is important to remember the effect of inflation. Over time, price rises will seriously erode the spending power of your capital. The BZW figures show that to beat inflation and enjoy decent capital growth, equity investment is the only option. After inflation, those pounds 100 stakes in equities, gilts and cash would have grown to pounds 37,640, pounds 470 and pounds 320 respectively by the end of 1996.
The BZW study also provides investors with some clues as to how long termist they really need to be with shares. Between 1918 and 1996 there were just 12 occasions when investors who bought equities were worse off, in real terms, five years later. There were just eight slots when equity investors lost out 10-years later, after inflation.
The worst year to invest in equities was 1968. It would have taken until 1983 to make money, in real terms, on shares bought in December of that year. At first sight, that sort of statistic in isolation might seem a little scary. But the real lesson to learn here is that if you hold on to shares for five years or more, you generally stand a good chance of beating inflation.
Of course, it is possible that the returns from shares will not be as good in the future as they have been over the last 80 years or so. Equally, though, the BZW numbers are based on the performance of all shares. If you had picked shares that performed better than average, you would have much better returns.
The BZW figures were calculated on the basis that all income earned through the shares was reinvested. Companies pay dividends to shareholders regularly, usually twice a year. By reinvesting this income in the stock market you will be better off than simply spending it.
Do not be put off shares by any of the intimidating jargon that City folk often use. If you do your homework first, there is no reason why you should not be a successful equity investor.
And there is certainly no shortage of advice available, both on how to invest in equities, unit and investment trusts, and on which shares to bet on. First, there is the media. Read the business, City and personal finance pages carefully for information and advice. Then there are professional advisers. There are several hundred firms of stockbrokers around the country who will be happy to buy and sell on your behalf, giving you as much, or as little, advice as you feel you need.
Justin Urquhart-Stewart, a director at Barclays Stockbrokers, reckons that investors should start off by investing in companies with which they have had some contact - an employer, perhaps, or the supermarket where you buy your groceries. You do not have to be a financial whiz-kid to profit from share-trading. Many people have a real feel for the prospects of certain companies, simply by virtue of dealing with them regularly. "People can really use this information to their advantage," says Mr Urquhart- Stewart.
It is probably easiest to begin by investing in really large companies, the so-called blue-chip stocks. These may not be the most exciting performers but, over time, they tend to produce solid returns. Blue chips are also much less likely to go bust, losing all your investment.
Avoid penny shares, stocks priced at a few pence per share, unless you have real expertise in this area. From time to time the odd penny share price rockets. But while these stocks look attractive because they are so cheap compared with the blue chips, for the most part they don't perform.
Novice investors should also steer clear of individual overseas equities, at least until they have mastered dealing in the UK stock market. Some overseas markets have produced excellent growth for investors, but it can be difficult to keep track of foreign companies. And it's usually more expensive to buy and sell in overseas markets. The best means of investing abroad is usually through a specialist investment fund.
The secret to successful stock market investment is to remember that you are looking for long-term growth. Remember those BZW figures rather than getting distracted by day-to-day market movements. Share prices have, in the past, always tended to rise by more than other assets. So don't be tempted to sell your shares just because prices fall one week.
It is worth noting that in 1987, the last major crash, when the FT-SE 100 index fell by a third in a week, share prices still ended the year higher than they had begun Even if you had invested the week before the crash you would have been back into profit by the end of 1989.
Ten years on, the 1987 crash, which felt so devastating at the time, looks like a small blip in the stock market's upward trend. For the record, the FT-SE 100 index dropped to about 1565 in October 1987; today it is about 5,100.
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