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SNAPSHOT SERIES #1
in association with
The Daily Telegraph
Saturday, November 10
Tom Stevenson, an investment columnist for The Daily Telegraph, has been writing about investment for 16 years. A former City editor in the national press, he is also an author and has founded share analysis and commentary services.
Making the most of your money means there’s no time to waste
Complex ﬁnancial jargon can confuse many people into inaction but this plain English guide sets out the fundamental facts you need to get started. Tom Stevenson – whose investment column is a must-read in The Daily Telegraph Business section each Tuesday – knows that you do not need to be solemn to make serious points. Here, he sets out a lively analysis of the risks and rewards of the main types of asset that individual savers and investors can use to accumulate wealth. He also explains how delay can prove a costly mistake and why simple mathematics strongly suggest that the sooner you implement a strategy for saving and investment, the easier it will be to achieve your ﬁnancial objectives. No single answer will suit everyone because individual or family circumstances vary so widely. But this guide should help you consider your options – perhaps in discussion with a professional ﬁnancial adviser – and reach informed decisions to help you make the most of the opportunities available today.
On the rollercoaster 7-9
How to ride out the ups and downs without falling off
Build a portfolio
Why maximising your spread helps to minimise your risk
Facts and forecasts 14-16
Take a good look at the past to make judgements on the future
Ian Cowie, personal ﬁnance editor The Daily Telgraph
Bulls, bears and trying to be in the right place at the right time
Theory and practice 17-19
Who runs them, who invests and whether they’re a good buy
Barclays Snapshot series 3
PICTURES: ALAMY, DANIEL JONES, GETTY, PHOTOLIBRARY.COM
More time to secure and enjoy our ﬁnances or more time to rue our failure to do so. I your bid for a secure future is time. being both realistic and achievable. The good The majority face a future of news is that you do not need any. schemes on which to rely. Compounding is a profoundly powerful force and used with skill and patience it will give you and your family the warm glow of . The slow but inevitable death of the private sector ﬁnal salary pension scheme has made it more urgent than ever that we and. The magic of compounding Getting rich slowly and inexorably is not complicated. discipline and an ﬁnancial competence and early enough start. with a sensible plan and from a young enough age. our children learn how to be intelligent investors. It’s our choice. slowly and surely mundane but it has the merit of over time. shelter their savings from tax efﬁciently or work to minimise the terrible toll that inﬂation can take on the real value of their assets. He was right. but most ﬁnancial freedom. Albert Einstein called compounding the eighth wonder of the world. That may sound signiﬁcant wealth. relative poverty because they do not Focus instead on the steady. There’s no Most people do not realise that with greater gift for your offspring than a little application. They do not start saving early The most important element in 4 Barclays Snapshot series nvesting intelligently. they can secure conﬁdence and there’s no better ﬁnancial freedom for themselves time to start gaining it than today.Getting started enough. no get-rich-quick people will not achieve it. and their family. Not just in terms of money but in the most important things that money can buy – the time and freedom to live life on your terms. Healthier lifestyles and medical advances mean that most of us will have more of that than our parents. It is hard to think There are no short cuts to of a more attractive goal. It can be achieved simply by harnessing the ﬁnancial world’s best-kept secret – the almost magical power of compounding. more importantly. can make you seriously wealthy. understand how to harness property relentless accumulation of real and ﬁnancial assets such as shares wealth through intelligent and investment funds to accumulate investment.
18-year-old sisters – let’s call them Prudence and Extravaganza. At 40. she will have amassed just £79. a nice return but only a part of the story because. She realises that she has nothing to show for the £20 a week she has spent without even noticing.000.000. not bad for a £20-a-week savings plan to which she hasn’t even contributed for the past 20 years. despite saving for a couple of years more than her sister.Getting started »» ﬁnancial security for the remainder of your lives. on her 38th birthday. consider the story of twin by putting aside £20 a week. A tale of two sisters The second year’s savings have To understand thoroughly the power grown in 19 years to £6.600 and so on.000 a year and by her 60th birthday she will have more than £500. By the time Extravaganza is 60. when most people are starting to think about saving. Prudence. the £1.000.000 by 10pc and the ﬁrst year’s increase is £100. Barclays Snapshot series 5 . starts saving £1. Belatedly she.000 she saved in the ﬁrst year has grown to £6. however. starts saving £1. ﬁnds 101 other things to do with her money until. for whom the compounding penny has dropped unusually young.000 a year – that’s just £20 a week – when she leaves school. By this time. Apply the same growth rate for 20 years and the 10pc rise in the ﬁnal year will be worth more than £600 – six times the ﬁrst year’s increase. It is a simple concept. investing it intelligently for a consistent return of 10pc a year (let’s not worry for now how she does that or whether the 10pc annual return is realistic). Grow £1. too. in each of the following 19 years. of compounding and the In 20 years. her problems are basically over because now the amount she is earning from her savings is already vastly in excess of the money she is putting aside. by the age of just 38. clever Prudence put aside another £1. Now let’s look at Extravaganza who. If we could tell our children only one story. the monetary value of each annual increase gets progressively larger. like most of us. If you increase a sum of money by the same percentage amount each year. around a sixth as much as Prudence. She never will. this would be high on the shortlist.100. After 20 years. the same 10pc rise is worth £110.000 a year in the hope that she will catch up with her sister. she can stop if she chooses By the time she is 50 her savings will be growing at £18.700. the third year’s to £5. she panics. The following year. importance time plays in its Prudence has amassed £57.000 magic.
If either you or your parents bought a house 30 years ago. although past growth is not an indicator of future performance – it would take around seven years to double your money. As Mark Twain famously quipped: they don’t make land any more. house prices have risen by a small but signiﬁcant percentage. you might have paid as little as £10. by the way. We have the opposite problem. build more houses than they need.Getting started »» Compounding and property You’ve probably already experienced the power of compounding. This is why it is so important not to delay. To use it. which have reached very high levels by historic standards of affordability.000 by the time you need the money. What a difference. But if you’ve 35 years to play with. The property market has the odds stacked in its favour in this country.000 for it. you’ll be looking at £320.000 to start with and 21 years to get to work with it. That massive rise has been achieved because in almost every year since the house was bought. The Rule of 72 A useful rule of thumb for measuring the power of compounding and for understanding the importance of starting to invest early in life is the Rule of 72. They can. Assuming the 10pc growth which Prudence and Extravaganza achieved – not a million miles away from the returns on property and the stock market over the years. If you’ve £10. A 4pc rate of growth will mean it takes 18 years to achieve the same result. In this way you can see that a 12pc rate of growth will double the amount you start out with in six years. and do. This is one reason why house prices have tended to grow faster than average earnings over time and why I would not want to bet against property remaining an excellent investment despite today’s apparently frothy prices. simply divide the growth rate you expect to achieve into 72. Property also beneﬁts from increasing wealth because as people grow richer they are able to spend more of their income on housing while still increasing their standard of living. you might hope to end up with £80. This simple guide shows how long it takes to double an amount of money at any given rate of interest. It is entirely possible that house prices. Each year that percentage gain was applied to a larger starting ﬁgure until the value of the house grew to a level that would have been scarcely imaginable at the outset. Betting against the property market 6 Barclays Snapshot series would have been a very expensive mistake. But that argument could have been made at many times in recent times. Today the same house is probably worth £250. in some parts of the country. One of the reasons why the US housing market is in such a mess today is that America does not have the same space problems and consequent planning constraints as Britain does. .000.000 or. considerably more. will not produce anything like these kinds of gains in future years.
They were dangerously exposed to that year’s hot investment asset – technology shares – and paid the price when it turned into the subsequent bear market’s worst performer. Meanwhile. Barclays Snapshot series 7 . domestic and overseas shares together with a range of other assets such as bonds. Diversiﬁcation is an important feature of any intelligent approach to investment. property beneﬁted from a sharp reduction in interest rates (some would say too sharp). While the stock market was losing half of its value in the three years to March 2003. The prices of oil. which reduced the cost of ﬁnancing a house purchase and so fuelled a rapid escalation in values. metals and more recently agricultural commodities have soared as a result.Riding the rollercoaster »» Riding the rollercoaster of investment T he differing performances of the housing and stock markets over the past decade – the ﬁrst has risen steadily while the second has been volatile and risen little in total – provides a strong argument for not putting all your eggs in one basket. as many investors found to their cost in the years after 2000. gold and commmodities would have prevented much of the suffering in the early years of the decade. A balanced portfolio of property. rapid industrialisation in China and India quickly altered the balance between the supply and demand for commodities of all kinds.
The only certain way of not getting wiped out is to ensure that you spread your risks prudently. we have not endured double-digit inﬂation since 1981.a man who went to sleep one night with £10. Sadly.8pc a year. can drastically reduce the purchasing power of the money you have saved. but rise in his net worth. The ﬁrst rule of intelligent investing is to live to ﬁght another day. Since 1996. Putting all your eggs in one basket is great if you pick the right one but 8 Barclays Snapshot series cost of living. of was brilliantly illustrated by Professors Elroy Dimson and Paul Beware the investor’s course. According to Barclays Capital. Even at that modest inﬂation rate. unfashionable tobacco sector in Inﬂation is not the monster it was increase the value of your March 2000 would have ended up investments is also working on the in the Seventies. called his broker to see how shun a well-spread portfolio at their his portfolio was doing. There’s a sobering City joke about living rose three-fold in just 10 years. on average. he stayed asleep for 100 years and. Like Sleeping Beauty. When he was asked for £250 for the paper. Overjoyed. a events that had caused this massive study they conduct annually for Compounding is a wonderful thing ABN Amro. The ﬁrst rule of intelligent investing is to live to ﬁght another day. while one who had put the same amount into the then red-hot technology hardware sector would have ended up with just £6. for an investor as we have seen. . prices have grown by 2. investors waking. they showed that an investor it is a two-edged sword. Even a modest rate of inﬂation. the Dutch bank. when the cost of diminish risk no one can realistically do that on a consistent basis. on Even within the stock market. he In it. the who had placed £100 in the deeply same force which will relentlessly was understandably less happy. The only certain way of not getting wiped out is to ensure that you spread your risks prudently with £767 six years later. he rushed out to School in this year’s Global buy a newspaper to read about the Investment Returns Yearbook.000 invested in shares. peril. but his grandson told the man his shares were now worth Marsh of the London Business enemy number one £10m. The power of diversiﬁcation His broker was long dead. You will have to run pretty fast just to stand still. compounded year after year.
she doubles her money in seven years. For every £1 of investment return she achieves. Mr Chancellor. Over an investor’s lifetime quite a lot of the nominal growth in the value of his assets is an illusion – it is what’s required just to keep in the running.000 at 6pc. You can’t go back and use them once the moment has passed. They don’t even have to tell the taxman about them on their tax return. Put another way. £10. At 6pc a year it takes her 12. the UK tax system is currently structured in a way that means most people need never worry about this drastic impost. In 35 years she will double her money ﬁve times with a 10pc return but three times at 6pc. imagine that the 10pc annual returns she generates over her successful investing life are taxed as she makes them at a rate of 40pc.000 at 10pc but just £80. Beware the investor’s enemy number two – tax Another little-understood aspect of compounding is that it magniﬁes massively the impact of what might initially seem to be an inconsequential difference in performance. she passes 40p on to Mr Darling in the Treasury. Everyone should put as much as they can afford into these tax-efﬁcient vehicles every single year.000 will grow to £320. Fortunately. prices have more than doubled in 20 years. at 10pc a year Barclays Snapshot series 9 . In the short-run that is an irritant but in the longer-term it will have a catastrophic impact on Prudence’s returns. and it is not often we can say this. Remember. Generous Individual Savings Account (ISA) and personal pension tax allowances mean that most people can shelter all of their savings from tax. Thank you.Riding the rollercoaster »» however. To return to sensible Prudence.
bonds. There are no more free lunches in investment than in any other walk of life. which should we choose and how much should we put in each? shares. CLOs and running hedge funds in Mayfair and ABSs. shares. Risk and reward bonds. Most of us can leave previously unheard-of ﬁnancial complex derivatives to the whiz kids products such as CDOs. property and commodities The main thing to understand about all these assets is that they offer the prospect of different levels of reward for different levels of risk. cash and pooled investment funds will continue to serve our purposes. Even the experts would be if it were to undermine our have found themselves battling to faith in saving and investing for the understand an alphabet soup of future. The greatest damage that the with the impression that the ﬁnancial world is complex. savers and investors have started worrying about things they never even knew existed. No one should pretend that the turmoil in the world’s ﬁnancial markets this summer is not a real problem.Building a portfolio S credit crunches and sub-prime crises. we know we need to get going as soon as we can and we know we should not put all our eggs in one basket. and that is likely If you’ve shown even a passing to slow investment and growth interest in the business pages this summer you may have come away in the future. incomprehensible turbulence could cause. so if you are attracted by the thought of bigger returns you must accept the 10 Barclays Snapshot series . With lurid headlines about Connecticut. The fear and uncertainty it has created has thrown grit in the machinery of the world’s ﬁnancial system. But what are those baskets. and dangerous. property. Throw in commodities and gold and you have more than covered the waterfront. however. A portfolio built around o we know we should invest.
as an owner of the underlying business. the returns usually are too. Shares are more risky than bonds because there is no guarantee that you will get back the amount you invested.Building a portfolio »» possibility that you will make bigger losses along the way. or gilts as they are known here. Like shares. both good and bad. although in today’s volatile markets many investors will consider a high-interest bank account offering 6pc a year or more to be an attractive proposition. too. Barclays Snapshot series 11 . The least risky asset of all is cash. Commodities. Because risks are low. Running cash a close second in terms of security are bonds. Both property and shares can help an investor reduce the risk posed by inﬂation because the rents charged by the owner of a building and the prices charged by a company are able to rise in line with the cost of living. Government securities. property is a real asset. offer a ﬁxed annual income and more or less guarantee repayment of the sum initially invested. Sometimes cash is a good place to be and any portfolio will want liquid funds to take advantage of opportunities in other assets. not to mention the inﬂuence of speculators. They also offer the possibility of capital gains (or losses) because their value rises and falls according to movements in interest rates. they offer no income. also offer a link to rising prices but their prices can be very volatile. such as industrial metals and agricultural crops. like gold. The best time to buy bonds is when interest rates are high and falling. Their price is a simple reﬂection of the ﬂuctuating balance between supply and demand. Its value can rise and fall and so. they participate directly in the rising value of a successful company and receive their share of its growing earnings in the form of a rising dividend. can the income stream it generates. There are only two threats to a cash investment – someone stealing it or inﬂation nibbling away at its buying power. In part this reﬂects the fact that. When you buy a share you take part-ownership in a company and you share in its fortunes thereafter. That is why they are termed risk capital. especially the ones sold by governments in stable countries such as the UK. Investors are prepared to shoulder the increased risk of shares because.
Historical facts and forecasts .
shares have produced a real return of 5. After adjusting for the impact of inﬂation. technically true but it does not mean that we cannot learn something meaningful from what has happened to different asset classes over the years. shares have been far and away the best investment.3pc a year over the past 107 years (since the survey’s start date in 1899). Barclays Capital produces a fantastic guide to this performance each year in its Equity Gilt Study.Historical facts and forecasts »» henever you see a ﬁnancial product advertised you will always see a warning along the lines that past performance is not a guide to the future. shares have Barclays Snapshot series 13 W . This is. Over shorter periods. The most recent edition shows that in the very long term.1pc and cash deposits have produced a real return of 1pc. while government securities (gilts) have beaten the cost of living by 1. of course.
Indeed the probability of shares outperforming cash rises to more than 90pc if you are prepared to hold them for 10 years or more.also beaten the other main asset classes. In as much as any investment asset has been able to offer a rock-solid guarantee. One of the explanations for the higher returns offered by shares is Medium to long-term terms. That’s pretty much the same range as for gilts and only a little investment wider than for cash. there has never been an example of shares losing money in real terms. Over 20 years.9pc. Push the investment horizon out further and the odds are stacked even more favourably towards equity investment. the lower the risk becomes.6pc for gilts and 3. By the time you get to a 23-year holding period. However. In no ﬁve-year period during the past century or so have shares returned more than 20pc a year nor lost more than 20pc in inﬂation-adjusted That is not the case for either gilts or cash. gilts 4. it has been shares. shares have historically offered not only higher returns but lower risk. if you hold your investments for at least ﬁve years. shares have returned 4. Cash has been even less volatile. Over 10 years. higher returns have been on offer for little extra risk to investors in shares. An investor in gilts. The longer an investor stays in shares. you might have doubled your money or lost almost 60pc of it over the 12-month period. But an interesting point emerges from the Barclays study – the longer an investor is prepared to stay in shares. would never have made more than 60pc in any 12-month period but would also never have lost more than quite short periods. . by contrast. the picture changes dramatically. although by a more narrow margin.6pc a year.9pc compared with 5. So even over probabilities If you had held shares for just one of the past 107 years.7pc for cash. for example. for example.6pc and cash 2. the lower the risk becomes. The probability of shares outperforming cash rises to more than 90pc if you hold them for 10 years the greater risk that an investor might lose money. 14 Barclays Snapshot series about 30pc of his initial investment after accounting for inﬂation. shares have been seen to give an inﬂation-adjusted return of 6. not supposedly safer government securities or cash. For such long-term investors.
Since the recovery in the market began in investments in these more March 2003. make a judgement about the relative performance of their chosen asset compared with all the other possible investments they could make. in rising as well as falling markets. there are times when large shares do better than smaller ones and vice versa. for example. Some experts claim that this extended period of outperformance may now reverse. In the real world. of course. the best performing shares their products in all economic were the very biggest but since then environments have their day – pharmaceutical and utility smaller companies have stocks tend to be defensive outperformed dramatically. Equities have beaten gilts over 10 years 83pc of the time and over 18 years 91pc of the time.Historical facts and forecasts »» Hold them for 18 years and you are almost certain (99pc) to beat cash on the basis of the historical record. let alone holds it for 107 years! They buy more focused investments and in doing so they. slows down. During a slowdown or recession. We have already seen that it would have been possible to avoid the worst of the 2000-2003 slump by weighting your portfolio more to . they tend to look for safer havens and companies that enjoy steady demand for market. especially if the corporate takeover boom. Barclays Snapshot series 15 property or commodities and less to technology stocks. some assets are doing better than others. consciously or not. Similarly. for example. In the ﬁnal years of the great Nineties bull Who’s in. which has tended to focus on mid-cap stocks. At any one time. 100 index of Britain’s biggest shares had doubled before suffering setbacks at the time of writing and the FTSE 250 of medium-sized companies did even better in the upswing. an academic exercise. When the economy is ﬁring on all cylinders. the FTSE difﬁcult periods. investors often favour shares in companies that are particularly affected by the economic cycle – industrial companies or retailers. no-one simply buys the market. who’s out? The Barclays Capital study is.
An investor who can. When everyone is looking for the safety of cash. everyone will be talking about investment and it will have a high proﬁle in the media. such as Fidelity’s Anthony Bolton. Even the best investors. 16 Barclays Snapshot series Along the way. Because of this. So how to spot when the market is coming to the end of a bullish or bearish phase? Here are a few pointers. investors should not worry too much about the short-term ups and downs of markets. few directors will be buying shares in their own companies. take his foot off the pedal when markets are turning down and increase his exposure when they rise again will be much more successful in the long run. Conversely. the shrewd investor will move in for the kill. have endured periods when they have got it wrong. most investment advisers will be enthusiastic and the general mood will be upbeat. Classic signs that a bear market might be on the way include the following: cash is considered a very undesirable asset.Putting theory into practice M arkets are inherently unpredictable and even experienced investors have difﬁculty spotting the best times to be in or out. there will be lots of new issues or companies ﬂoating on the stock market. Over time. . however. at the very least. there will undoubtedly be some nasty air pockets which will leave us feeling distinctly queasy. bull markets tend to start when few of the above apply. interest rates may be low and about to rise. markets have tended to rise because they reﬂect the growing wealth of the world and it would be surprising if this were not to continue. valuations are at historic lows and no-one is interested in stocks and shares.
there are countless crucial questions. and never to be afraid of Barclays Snapshot series 17 . As we adviser will help you with these have seen. A good of course. just the ﬁrst step.Putting theory into practice »» Expert Advice decisions to be taken about timing. It makes to consult fully authorised advisers representing ﬁnancial institutions with valuable reputations they must protect. asset allocation and the selection Deciding to become an investor is. of individual investments.
Size and style of investments matter greatly. mentioned at the start of this guide. You should be maintaining the value of your savings investor am I? How long have I got to invest? How prepared am I to lose money? How much do I want to be involved in the process or am I more interested in getting on with the rest of my life? an exposure to the property market – in fact you are likely to be over-exposed to it relative to your other assets.asking questions. is possibly the hardest. Indeed a study conducted in the early Nineties. There is a rule of thumb among investment advisers that your portfolio should include a Getting the right mix percentage weighting in bonds that matches your age. If you securities and someone close to are just starting out. So a young The answers you give to these investor might have a ﬁfth of their questions will help to determine how investments in ﬁxed-income you divide your investments. like Prudence – retirement more than half. Determinants Of Portfolio Performance. Being in the right place Asset allocation is crucially important. If you live for 30 years after you stop earning. Most of your investments will be in shares with a proportion in cash to take advantage of the dips in the market. a major consideration should be maintaining the inﬂationadjusted value of your savings and The probability that people will live in retirement for many years changes the arithmetic of asset allocation. however: what kind of an helpfully in your favour. ABN Amro has . If you also own your house or ﬂat you will have already acquired or even decades changes the arithmetic of asset allocation. Beware of jargon you do not understand and insist on answers in plain English. concluded that 90pc of the variation in institutional investment returns is caused by asset allocation and less than 10pc by market timing or stock selection. mentioned in chapter one – you Some would consider this overly may want to maximise your cautious and there is no doubt that exposure to the asset which we the increasing probability that people have seen stacks the odds most will live in retirement for many years 18 Barclays Snapshot series not simply maximising the income from them. The ﬁrst question.
Putting theory into practice »» found. has calculated that £1. an independent adviser. Geography is a major factor too. Being in the right place at the right time has been a feature of the market for many years.000. In 2006.000 rolled over each year into the best performing sector in each of the past 25 years would have grown to £234. . a massive difference when compounded year after year. The ﬁrst is a 24pc rise per year while the second is a 5pc a year average loss. the Chinese stock market recorded a 117pc rise while Japan edged ahead by just 3pc. for example. that small cap shares have outperformed big stocks by more than 6pc a year since 2000. while the same £1. Russia rose by 58pc while the US grew by just 16pc.000 in each year’s worst performer would have shrunk to £267. AC Financial.
we cannot hope to capture even the market’s total return because invariably we buy the wrong sort of funds at the wrong time. with more than 2. brokerage. These can add up to 2. advertising and so on. intriguing book called The Little Book Of Common Sense Investing in which he makes a compelling case for abandoning the attempt to beat the market and simply participating in the relentless growth in the world’s economy by buying a low-cost index tracking fund. styles or geographies means they can invest relatively is not necessarily an argument for cheaply and pass on the beneﬁt trying actively to choose the winners to investors. investors could be forgiven for reﬂecting that it’s possible to have too much of a good thing.2pc a year. the founder of the that investing is a zero-sum game. human nature being what it is. has written an so investors as a whole can capture 20 Barclays Snapshot series only the total gain of the market minus the costs of investing – management fees.000 unit trusts and open-ended investment companies (OEICs) plus investment trusts available in the United Kingdom. The essence of Bogle’s claim is John Bogle. This simple approach fund sectors. American investors put $18bn into equity . Bogle’s second argument is that. sales commissions. successful Vanguard fund One investor’s gain is another’s loss management group. These funds simply buy every stock in a given index and never attempt to make a judgement about The fact that performance varies which will do better or worse than wildly between the best and worst any other.Different types of pooled funds C hoice is a virtue but.5 percentage points of a fund’s performance each year while a tracker fund can operate at maybe 0. This might not sound much of a difference but the rules of compounding turn it into a colossal difference over any extended period. and avoid the losers.
heating. more active investors might decide to back their own judgement with a relatively small proportion of their portfolio invested in individual shares. growth . for example.Different types of pooled funds »» funds in 1990 when stocks were dirt cheap and a combined total of $420bn in 1999 and 2000 when they were patently expensive. stocks and value investments). Moving outwards. the holdings would start to include a range of pooled investments (unit trusts. this more cautious approach is entirely appropriate. is climate change. say. you should stick to tracker funds or a spread of actively managed funds. At the heart of the portfolio would be long-term core holdings including the investor’s house and some index trackers. or corn. If you have neither the time nor inclination to learn more about investment. like investment bank Goldman Sachs. geographies. With the FTSE 100 trading at little more than it did 10 years ago. It suggests that the only sensible thing to do is to save regularly in a tracker fund and stop kidding yourself that you can beat the market. however. and still below the peak it reached in 2000. housing and transporting a larger developed world will put upward pressure on the prices of raw materials such as oil. Barclays Snapshot series 21 Where’s the fun in that? Bogle’s argument is ultimately rather dispiriting. They may decide that the only thing that really matters. looking forward. they prefer to shelter within the perceived safe haven of a managed fund. so they’ll put money in companies investing in sources of alternative energy. sectors and fund managers. clothing. For many people. ﬁnancial security can be achieved if you start early enough. that the most important economic development of the next 20 or 30 years is the unfolding growth in developing countries such as Brazil Russia. his approach seems actually to be rather risky. whether that is a company share. As we have seen. prepared to pay a fund manager to make the investment decisions and to beneﬁt from the diversiﬁcation of risk within a portfolio of 100 or more individual investments. a bond or investment in an individual commodity – copper. metals and crops and invest in funds that reﬂect that call. India and China – the so-called BRIC countries. More sensible – and fun – would be an investment strategy based on concentric circles. This is where investors are able to back their big-picture judgements. They may decide that the strains of feeding. Even if they understand that in the long run the stock market is not more risky than other savings vehicles. Finally. They may decide. Pooled investments Most investors will not feel comfortable pushing out into this outer layer of investment in which they make decisions about individual assets. OEICs and investment trusts) diversiﬁed across styles (large companies and small.
The most famous exponent of this high-yield investment approach was an American fund manager called Michael O’Higgins. for example. with a high dividend yield. madness including the best-selling Zulu Investors who do decide to push Principle. It looks for shares where the most commonly used valuation measure – the multiple of earnings at which a share price trades – is low when compared with the expected growth in proﬁts. They will have to learn how to value a share on the basis of its earnings. For the intelligent investor. There are plenty of other share selection methods that have worked over the years. they can sometimes gain currency just as they lose their edge. Another widely used method focuses on dividends. Another point to bear in mind is that a fund manager with a portfolio of 100 stocks probably knows some investments very well and others little or not at all. For example.by the steady accumulation of relatively unambitious yearly returns. looking for the companies which offer the highest dividend income when measured as a percentage of the share price. They are a staple of the investment book publishing machine and to the wishful-thinking investor looking for proﬁts without pain they can seem like the holy grail. They will also want to explore different share selection methods that have a track record of success. Over the years there have been plenty of “magic” stock-picking formulas. But it is important that people who do this understand that they are taking risks nonetheless. If a fund holds 100 stocks of equal value. who popularised the method in a best-selling book Beating The Dow. The ﬁrst is that excessive diversiﬁcation dilutes the potential gains available. provide an excellent starting point in the selection process. Unfortunately. is a simple statement of out into this outer layer of higher-risk common-sense investing. Some investors buy . a doubling in the value of one investment will increase the value of the whole portfolio by just 1pc. dividend yield or assets. In a more focused portfolio of 10 shares. however. but potentially higher return In essence the Slater approach is individual investments will ﬁnd that to ﬁnd shares which offer maximum 22 Barclays Snapshot series earnings growth for the lowest possible price. often perform relatively well because investors are attracted to the high income and bid up the price when they buy the shares to secure it. they can. The method is sometimes known as Growth At A Reasonable Price or GARP for short. growth stock investing as popularised by Jim Method in their Slater through a series of books. the same doubling would increase the value of the portfolio by 10pc. Companies like this. like unit trusts marketed on the back of a stunning ﬁve-year performance. they have entered a whole new world. He insures against his lack of knowledge with a wide spread of investments but there is a price for the buyer to pay.
Here are ﬁve ways to do this: 1 Have a margin of safety The key to successful investing is to establish a margin of safety. You might change your method according to the state of the market or prevailing investment trends but it is vital that when you make an investment you know why you are doing it. when it is most optimistic. except in a lower than it started on just ﬁve occasions. On some of the stock market but logic and days your partner is on top of the past performance suggest the world and offers you a high price to long-term trend is upwards. If you look at a long-term chart of the stock market. Sometimes an investor’s biggest enemy is the face he or she sees in the mirror. 2000. is your friend. You should seek to buy the the legendary crashes of 1929. The trend. The best way is to invest with a method. Don’t let it slip away. a legendary 2 Stick with it – save regularly American investor. 1994. The opposite technique is to buy the most out-of-favour shares in the market. Mechanical screening methods such as those used by 4 Don’t be fooled by Mr Market Benjamin Graham. while he is making these ﬂuctuating offers. but to acknowledge a mistake and cut time. This is difﬁcult but essential. a loss. Slater and O’Higgins have the merit of taking sentiment out of the selection process. Five steps to intelligent investing Intelligent investing is really just stacking the odds in your favour. as they say. very minor way. Barclays Snapshot series 23 .Different types of pooled funds »» on momentum. They watch for shares that have begun a rising trend and jump on the bandwagon until the outperformance starts to ﬂag. The key to investment success and It can be hard to hold on to an the ﬁnancial security it can bring is investment that has doubled or not asset allocation. said you should No-one can predict the future path view the market as you would a neurotic business partner. stock market has ended the year The key point is that. 3 Cut losses and run proﬁts One of the hardest things in 5 Start today investment is knowing when to sell. market when it is most downbeat 1987 and even the savage bear and to look to ofﬂoad your shares markets of 1973/4 and 20002003 are barely perceptible blips. a contrarian approach that hopes to proﬁt from the market tendency always to over-react to both good and bad news. share selection trebled in value and just as difﬁcult or a knowledge of high ﬁnance. History shows that getting out of mistakes early and riding the winners is the way to success. buy out your share of the business. the underlying value of the business does not change 2001 and 2002. In the past 30 years. the UK On others he is depressed and will take a low price for his own share. in 1990.
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