'Things may get nerve racking, but those who are prepared to take a long term view win in the end'

John Willcock
Friday 16 August 2013 01:26

Private investors surveying the turmoil in the markets this week must be wondering what on earth is going on. First of all the technology stocks that seemed only to go upward, the e-businesses and dot-coms, abruptly fell out of bed following a hostile court ruling against Microsoft.

Then just as the sell-off seemed to be gathering pace in the US, the London Stock Exchange's computer system for share prices collapsed, delaying the opening of the market on Wednesday until 3.30pm. The last day of the tax year is traditionally when private investors re-jig their portfolios to lock in this year's capital gains tax allowance. The Exchange opened to 8pm to complete the backlog of trades.

Not a market for faint hearts, then. But should investors ever have expected anything else?

The computer crash apart, there is an argument that this week's market gyrations will have provided a valuabledose of medicine to those recent converts to share investment who had the impression that shares can only go up. This applies particularly to the army of new private investors who piled into internet stocks in the last quarter of last year, driving the volume of share dealing by private client stockbrokers to new highs.

It's not just direct investors who may be worried. If you have just put savings into an investment trust or unit trust specialising in tech stocks or small companies, you may be feeling exposed. Or perhaps you have just gone for an equity ISA, in order to beat the end of the year tax deadline last Wednesday. None of this should put you off investing in shares. Shares are risk capital that can gyrate wildly in the short term but virtually always turn out to be the best investment in the long term, compared to other things like property, gilts and the building society.

You should only, after all, be putting money into shares that you can afford to lose. No-one should enter the stock markets until they have sorted out their basic personal finances such as somewhere to live, an emergency cash fund, a pension and life assurance.

There may even be bargains ahead. A month ago Terry Bond, who writes our Diary of a Private Investor (see Page 5), said he was selling some of his tech stocks and buying some of the "Old Economy" stocks such as brewers and banks. This is because over the last couple of years we have been confronted by a tale of two markets. While the internet, media and telecoms stocks have forged ahead, boring old companies that actually make things (such as a profit) have experienced a full-blooded bear market.

Many of these unfashionable companies are now seeing their share prices recover. We may well simply be witnessing an overdue rebalancing between the old and new sides of the economy.

That optimistic view may be proved wrong if the sell-off continues, but there is a more fundamental point to be made. The best way to invest in shares, the most reliable way to make money out of them, is to invest for the long term. The longer you hold shares, the greater their advantages show up against other forms of investment. If you reinvest the dividends, as most funds like unit trusts do, then the compounding effect makes your investment pot grow even faster.

If your are planning to hold shares for less than five years, say, then you really should question whether you should have bought them in the first place. Short term speculation on the stock markets is always going to be a gamble.

Volatility is growing and set to get worse. The reasons have a lot to do with improved technology, which now allows billions of pounds worth of shares to be traded around the world at the touch of a button. If you do invest in shares you should accept this as a fact of life. Things may get nerve racking, but those who are prepared to take a long term view win in the end.

John Willcock is Personal Finance Editor of The Independent.


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