Going up?

Where do you want to be?

It's true that money doesn’t grow on trees, but one of the ways of making money long term is by investing in the stock market. But how can you tell your leylandii from your withering weeds? Roopi Makkar outlines some of the things to consider when starting from seed.

At the height of the technology crash at the start of this decade, investors were taught a sober lesson – that shares really can go down as well as up. But with a solid strategy and realistic expectations, investing can be fun, rewarding and potentially enriching Whether you are a novice interested in investing for the first time, or if you have already taken steps to splash some of your cash, there is a multitude of companies across a range of industries and sectors inviting you to invest your money. But you need to start by sitting down with an investment professional and assessing what you want to achieve.
Adrian Hick, Senior Manager for Offshore Private Banking, says:

"Consider your dreams and objectives. Where are you now and where do you want to be? Are you prepared to get there by taking some risks, or are you risk averse?"

The amount of risk you can take is one of the biggest factors to consider. Adrian Hick refers to the 'mattress factor', which is "the amount of risk you can take to allow you to sleep at night. You can take risk and then scale it back at any time – there are lots of different steps you can take along the way. But in order to get some returns there will always be an element of risk."

Know your needs

The other main factor is the time you can allow for your investment to grow. Joanna Crookall from stockbrokers Ramsey Crookall says:

"To establish a portfolio, you need to be very clear what level of risk you can take and what timeframe you need. You also need to consider whether you need any income or if you prefer capital growth. Either way, you should ideally be looking at investing over a minimum period of five years."

There are, of course, many products on the market to suit your profile, and one of the safest ways to invest is to go for a structured product with guarantees such as Offshore Limited Edition Deposits (OLEDs), which give exposure to the stock market with a guarantee to return your capital. They are lower risk with a higher potential return than that available on a traditional fixed-term deposit, and will offer you exposure to market opportunities while maintaining a higher 'safety' factor.

Government or Company bonds are also a lower-risk way to invest. It works with the investor 'lending' the issuer some money and receiving a bond in return, and is a good way to earn income along the way. You could also look at unit trusts, which are a pooled investment. A fund manager buys shares in a range of different companies and puts these in a fund allowing you to buy 'units' in the fund. Because the fund contains a range of shares, the risk is spread. The fund is 'open ended' – the number of units rises and falls as investors buy and sell them. Each unit trust fund has a specific strategy that enables you to invest according to your risk profile.

Investment trusts also invest in the shares of different companies allowing you to spread the risk, but the difference is that they are companies in their own right, so you will be investing directly. However, their value can fluctuate more than a unit trust.
You can, of course, create your own portfolio by investing directly into equities. However, this is a high-risk strategy, as the value of shares generally rises and falls in line with the performance of a business. If the company does well, you will be able to sell your shares at a profit; if it doesn’t, your shares may fall in value or even lose their value altogether. Usually, shares are bought and sold through a stockbroker.

Spend, spend, spend

Think also about how you are going to spend the money. The currency you invest in is a predominant aspect. If you invest in America and your shares go up – great. But if you then take your money out and convert it into sterling, it's possible that you might actually have lost money because the dollar is so weak against the pound. And how you invest is not necessarily tied to your residency. For example, you might be living in Spain but intend to live in the UK at a later date. If you don't need the money for income, you might consider investing in the London Stock Market so that it will already be in sterling when you need it. Joanna Crookall says: "The performance of your portfolio is benchmarked against standard indices. For instance, if you were invested in British equities, a typical benchmark would be the FTSE 100, which is fine for sterling investors. But if you were a dollar investor invested in North American equities, you would be looking at the Dow Jones or the Nasdaq. Wherever you live, the ultimate test is to beat inflation. The whole point of the market is that over a period of time you want to grow your capital rather than erode it. But if you look at the performance of stocks compared to savings, you'll see that the stock market way outperforms cash or deposits over a long period of time."

Top tips for stock market success

• Make sure that the cash you have set aside to invest really is extra – above and beyond all essentials such as mortgage payments, utility bills and insurance premiums.
• Invest for at least five years and more if you can. Given a long period of time, shares have historically performed better than most other asset classes.
• Work with an investment professional to set out a cohesive, long-term strategy that meets your needs.
• Charges do impact on overall performance, therefore management fees and any other charges should be considered.
• An old adage worth repeating is: "Don't put all your eggs in one basket". Diversify your investment across a range of asset classes – cash, bonds, property and equities.
• Never forget the golden rule: shares, and the income from them, can go down as well as up.

Stock market – the hits and the flops

The London Stock Exchange's own shares have been one of the star performers in 2006 with an 86 per cent rise as its shares benefited from bid speculation. Over the past five years, an investment of £1,000 into the company when it listed in July 2001 would have produced a total investment return valued today at £3,244.44.

The best performing stocks of the past decade have largely been those exposed to the unprecedented property boom. London-based estate agent and property services group Savills has been the best investment, delivering a staggering 1,949 per cent return since 1996. A £1,000 investment would have grown to nearly £20,050.

By far the most recent infamous example of how to lose money is the dotcom rise and fall. The dotcom bubble burst in early 2000 after the FTSE 100 recorded its all-time closing high of 6,930.20 on 30 December 1999. The US S&P 500 Index recorded its all-time high on 10 March 2000. When it crashed, investors who had doubled their money saw it fall by at least half, and it heralded a downturn in investor and market confidence that has only just recovered to its previous high*.

* Past performance should not be seen as an indication of future performance. Investments into Stock Market Instruments do not include the security of capital which is afforded under a desposit with a Bank or Building Society.