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Investing For Growth: Spread your bets across the market

AS STOCK markets climb ever skyward, breaking new highs week after week, savers who are not invested in equities must be feeling pretty sick.

But successful investing is not about sticking some money in a few companies' shares, standing back and watching it grow. In fact, unless you have an excellent stockbroker, know the inside track on a company or are prepared to devote a considerable amount of time and effort into monitoring your investments, putting money directly into the stock market could leave you with a sour taste in your mouth and a considerably smaller nest-egg.

The trick is - as the investment industry's mantra goes - not to keep all your eggs in one basket. Diversification is the name of the game. And for most people, unless you have hundreds of thousands of pounds to invest, the best route to stock market success is likely to be through a collective investment scheme such as a unit trust or investment trust.

What nearly all of those in this position are looking for is to build a balanced investment portfolio. The creation of any investment portfolio begins with two fundamental questions - what objectives are you trying to achieve with this capital, and what level of risk are you willing to take in planning a suitable investment strategy?

Overwhelmingly, the two primary objectives will be to generate income and to achieve capital growth, with the balance between the two determined by the circumstances of the individual concerned. Much of the choice between the two will depend on personal goals. You may wish to build more capital for retirement, to boost current income, or perhaps to save for a specific purpose or event. For most people, balance will be the operative word when it comes to choosing the investment funds.

Graham Bates, of the independent financial adviser Bates Investment Services, in Leeds, says: "Your investment portfolio should be anchored with a solid core of fixed interest securities that will provide a predictable return. But clearly, a sensible investment strategy will also include an element of equity investment, to be held over the long term, since equities have historically proved to far outperform the relatively modest growth of both cash deposits and securities."

Today's increasingly knowledgeable and sophisticated investors are familiar with the principle that risk tends to rise in direct proportion to returns, but "risk" in the investment arena can be interpreted in many ways.

As far as equities are concerned, in its strictest sense risk can be literal. The value of an equity investment can go down as well as up, so that if for any reason you are obliged to sell an equity holding at a time when its price is lower than you originally paid, you will make a loss.

"For cautious investors, it may not be this ultimate risk that frightens them away from the markets, but simply the prospect of volatility and unpredictability that at their worst can make equity investment something of a rollercoaster ride," says Bates. "The key is to appreciate the different levels of equity risk."

The developed stock markets of the UK, US and continental Europe are likely to provide far greater stability than you would expect from less developed and more unpredictable markets such as Latin America or the Asian countries. Economic and market cycles have always produced ups and downs in equity values and almost certainly always will. The table below illustrates this point and shows which unit trust sectors have been the best and worst performers over the past three years.

The average Japanese fund has been the best-performing over the past year, returning 40 per cent, but over three years it has lost almost 18 per cent, making it the 21st worst-performing sector out of 25.

Most investors' portfolios are heavily weighted towards the UK. But in the past few years this strategy may not have produced the best returns. Over the past year to mid-April an investor who put a third of their savings into each of the average performing unit trusts in the Europe, the UK and US would have achieved a return of 7.25 per cent.

The average UK growth unit trust would have grown just 0.99 per cent. If the money was split four ways and invested in Japan, too, the return would be even higher at 12.52 per cent. Over three years, the three-way split achieved 59.52 per cent while the average UK fund grew by 53.86 per cent and over five years the return from the three-way split was 107.99 per cent, the UK average fund growing 88.67 per cent.

So where do you start? Peter Jeffreys, managing director at leading fund analysts Standard & Poor's Fund Research, says: "The key to a good fund is one which is managed by someone who has developed a sound and disciplined investment process and sticks to it. The process must be applied consistently. A good fund manager will also apply risk controls so the fund will not deviate too much from a benchmark. It is important to give investors as close to the market return as possible."

Choice is clearly critical. But in an already crowded financial marketplace, making the right choices can be difficult. There are more than 2,000 unit trusts on offer. The choice of products is changing and expanding all the time, equity markets rise and fall, and interest rates fluctuate. Regular monitoring is vital. Your objectives and circumstances may also change.

In principle, creating and managing the right investment portfolio is straightforward: objectives and risks; balance and diversification; selection, good advice, monitoring and management. In practice, it is complicated hugely by the confusion of choice and the vagaries of change.

Today we start a regular column which should help you not only to pick funds from the vast array on offer, but also enable you to monitor your portfolio once those investments have been made.

With the help of Standard & Poor's Fund Research I will look at sectors, regions and themes, picking out the funds to give the savvy investor some useful ideas as both a starting point and to aid your portfolio development.

How Managed Funds HAve Fared

1 year % 2 year % 3 Year %

Japan 40.1 16.95 -17.77

Far East Including Japan 18.36 -9.53 -19.96

North America 17.53 65.66 71.99

UK Gilt 11.88 28.35 39.49

International Equity Growth 10.64 38.41 42.63

Far East Excluding Japan 9.63 -23.92 -28.48

International Equity & Bond 9.5 32.47 37.54

UK Fixed Interest 8.88 27.06 42.2

UK Equity & Bond 8.75 47.48 68.82

International Fixed Interest 8.66 15.01 11.88

Managed Fund 7.88 35.38 47.55

UK Growth & Income 7.66 45.1 69.01

International Equity Income 7.66 43.94 54.28

UK Equity Growth 6.49 41.08 63.72

UK Equity & Bond Income 6.39 36.41 56.37

UK Equity Income 5.62 42.52 66.5

Fund of Funds 5.41 28.96 35.75

Money Market 4.74 10.09 15.13

Property 4.02 20.7 40.29

Europe 3.28 48.47 66.45

Investment Trust Units 0.65 25.54 37.98

UK Smaller Companies -2.76 14.43 31.03

Index Bear -4.07 -29.22 -38.65

Commodity & Energy -10.3 -32.7 -41.09

Emerging Markets -12.8 -20.3 -16.83

Source: Standard & Poor's Micropal to March 1999