You can win if you wait

Stocks reward the steely nerved, vigilant and committed. Hang on for the ride, says Magnus Grimond

AFTER 24 weeks of unravelling the mysteries of the stock market for the novice investor, it is time for this column to call it a day. I hope it has whetted your appetite, or added to your knowledge. At least a few lessons should be clear.

The first is that stocks and shares remain one of the best ways to enhance your savings. In the six months this column has run, the stock market, as measured by the FT-SE All Share index, has risen by over 9 per cent. Had you popped that pounds 5,000 inheritance from Auntie Madge into a fund that mirrors the market, like Virgin Direct's UK Index Tracking unit trust, back in October you would now be pounds 490 richer, before charges.

The safety-first approach of stuffing the cash in a bank or building society account would have left you with a little over pounds 180 in interest. Even in these economically prudent times, inflation would have eaten up around half of that modest sum.

Of course, the stock market has had its ups and downs since we began. October itself probably gave investors the biggest rollercoaster ride since that infamous October of 1987 and its Black Monday meltdown. Madge's pounds 5,000 invested on 6 October in that nice Mr Branson's Virgin tracker fund would have been looking a rather deflated pounds 4,627 by the end of the month - a heart-stopping pounds 373 loss in 29 days. If you had been desperate for cash in early November you would probably have been put off equity investment for life.

Which brings us to lesson two. The stock market rewards the patient, the committed and the steely-nerved. There are ways to get rich quick through shares and their racier derivatives, but don't think you can just invest and forget. Penny shares, warrants, options and the like require a semi-professional approach and constant vigilance. They are not for the faint hearted.

The rest of us - prepared to put some effort into picking shares, but not to spend every waking hour worrying about it - need to do some soul- searching. How much can we afford to lose? The resulting figure should represent our pot for speculation.

Then ask: "How big a gambler am I really?" If you are still uncertain, safe blue chips like Marks & Spencer or Barclays may be the biggest risk you should take. Better still, test the water with a collective fund like an investment or unit trust which spreads the risk for a modest investment.

More adventurous types will quickly become bored with this. If you want rocket-propelled excitement, growth shares are probably your bag. Technology stocks like Misys, Admiral and Eidos would have given you a run for your money in the past year, having comfortably doubled in that time.

But remember the wealth warning from the regulator clearly displayed on every investment wrapper: "Past performance is not necessarily a guide to the future." Shares that shoot up one minute, or even for years, can crash down again in short order. No investor should forget "comet stocks" like Poseidon, Polly Peck and Bre-X. An investment, to be a good one, must have a credible story, credible management and credible financial backing.

Remember also that the stock market is as much prone to fashion as anything else. A punter who had been asleep for the past 10 years would not recognise the scene today. Hanson, once king of the conglomerates, is now reduced to quarrying stones. BTR is stumbling along with the walking wounded, while clearing banks like Barclays enjoy star status.

Of course, the attractions of many businesses have changed in the 1990s. But the transformation in financial services is not enough to explain why banks had single-digit price-earnings ratios in the 1980s and are now honoured with values in the high teens or low twenties.

Fundamentals do matter, of course. High-yielding shares are an excellent example: a yield much above the market average, currently 2.9 per cent, should trigger alarm bells about the company or its prospects.

Even so, high yields (meaning a low share price) are often an over-reaction by the market to bad news. Very often the shares bounce back: - indeed the FT-SE 350 High Yield Index was the best-performing major index last year, producing growth of nearly 26 per cent.

This is where those steely nerves come in. A buyer of T&N, the former asbestos group, for instance, when its shares were yielding a chunky 6 per cent plus last summer, would have since doubled his money. It helped, of course, that an outside bidder saw value where the stock market feared to tread.

So should the bravehearts continue to pile into the market, or is discretion the better part of valour? The gloomsters say the rise in gross domestic product could crash from 3.5 to 4 per cent last year to as little as 2 per cent this: hard to reconcile with average p/e ratios in the 20s and yields below 3 per cent for only the third time in 25 years. The last time shares gave so little income was ahead of the 1974 and 1987 crashes. You have been warned.

Start your day with The Independent, sign up for daily news emails
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Abuse - and the hell that came afterwards

Abuse - and the hell that follows

James Rhodes on the extraordinary legal battle to publish his memoir
Why we need a 'tranquility map' of England, according to campaigners

It's oh so quiet!

The case for a 'tranquility map' of England
'Timeless fashion': It may be a paradox, but the industry loves it

'Timeless fashion'

It may be a paradox, but the industry loves it
If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

Could have done with Osama bin Laden staying alive?

Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
New exhibition celebrates the evolution of swimwear

Evolution of swimwear

From bathing dresses in the twenties to modern bikinis
Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine