Make it in the markets

For all their volatility, stocks and shares pay off in the long run

Investing in the stock market for the first time can make many investors feel a little edgy. Stock markets rarely move steadily upwards in a constant line: there are swings upwards and downwards along the way.

Investing in the stock market for the first time can make many investors feel a little edgy. Stock markets rarely move steadily upwards in a constant line: there are swings upwards and downwards along the way.

The recent performance of the key FT-SE 100 index shows this: it shot to an all-time high of 6,930 at the end of 1999 but since then has fallen by 10 per cent. With some analysts speculating that the longest bull run in market history is coming to an end, is now a good time to invest in stocks and shares?

The question will be pressing for many investors who are keen to use this year's individual savings account (ISA) allowance (£7,000 this year, £5,000 in subsequent years) before the 5 April deadline, but who don't want to see share values tumble the day after they invest.

Some analysts are optimistic about the direction of the stock market. Michael Hughes, director of Baring Asset Management, predicts the rise will continue until the FT-SE hits 10,000. He thinks continuing low inflation, along with the growth of small firms and start-ups fuelled by the internet, will maintain market confidence.

Others are more cautious. Elissa Bayer, head of London private clients at stockbroker Greig Middleton, says the recent surge in technology stocks has masked poor performance elsewhere on the stock market. "The potential to make a lot of money is great, and so is the potential to lose it," she says.

But for longer-term growth, you need to be in the stock market. The rewards make the risks worth while. If you had invested £1,000 in the average building society account 15 years ago it would now be worth £2,267, according to figures from Barclays. But if you had invested it in the stock market it would have increased to £9,887.

But you should only invest money you can afford to tie up for at least five years as this will give your portfolio more time to overcome any setbacks. James Dalby, researcher with Bates Investment Services, an independent financial adviser, says there is little point in waiting for the perfect time to invest; it will never come. "It is the length of time you are in the stock market that matters, not whether you entered at the best possible point," he says.

However, you do not have to invest all your funds in one go. "Phasing in payments often calms people's fears. You can pay in several lump sums at different stages or set up a regular savings plan," says Mr Dalby.

Another way of protecting yourself is to spread your money across a range of different investments. Pooled investments such as unit trusts and investment trusts spread the risk between dozens or even hundreds of companies.

When setting up your growth portfolio, it is wise to start with those blue-chip companies that should retain their value over the long term.

Most UK investors also start their portfolio close to home. Mr Dalby recommends medium-risk funds such as Aberdeen Blue Chip, Jupiter UK Growth and Save & Prosper Premier Equity Growth funds.

He also advises investors looking for growth to opt for income-generating funds and pay back any income earned into the fund. His favourite UK income funds include Jupiter Income, Perpetual Income and Fidelity Income Plus.

But it is important to leave some money on deposit in a bank that can be used in an emergency, so you are not forced to sell shares at a loss after their price has fallen.