Wednesday, 30 December 2009

Lessons to be learned from the decade that shocked the stock market

Lessons to be learned from the decade that shocked the stock market
It has been a decade that many investors would rather forget.
On December 31, 1999 the FTSE100 closed at 6,930 and 10 years on it still has some distance to go before it regains this peak, sitting at around just 5,300 last week.

By Emma Simon
Published: 7:00AM GMT 28 Dec 2009

1. A guarantee is only as good as the guarantor
Structured products may have been guaranteed by Wall Street investment banks. But once Lehman's went bust, people realised that many of their guaranteed investments weren't as guaranteed as they thought.

2. Don't buy something you don't understand
Financial advisers often point out that many people drive a car without fully understanding how the internal combustion engines works. But those who got lost money in split-capital trusts and precipice bonds will no doubt now think twice before being reassured by such twaddle. If a car breaks down there is always the AA; there isn't any equivalent rescue service when it's your life savings.

3. Higher returns come with higher risks
If you want to better returns than a building society account you need to take more risk with your money. This almost always means you could lose capital.

4. Don't pay more than you have to
The advent of the internet and price comparison sites mean people can now shop around for financial deals and compare prices and products more effectively.

5. Long-term investments don't always mean long-term gains
Just because an investment should be held for a minimum if five years, doesn't mean you will get a positive return at the end of this period, as the "lost decade" for equities demonstrates.

6. Ask how your adviser earns his money
Commission skews judgements; it pays to inquire why comparable products aren't being recommended.

7. Read the small print
What will you be charged if you exceed your overdraft limit? What penalties will be applied if you cash the investment in early? When can the insurer turn down your claim? Such vital information is almost always in the small print.

8. Don't rely on easy credit
Many assumed cheap loans, remortgages and interest-free credit cards would bail them out of any financial difficulty. But these credit lines disappear when times get tough.

9. Don't rely on others to provide a pension
If you want a decent retirement, start saving. Employers have watered down pension schemes while the value of the state pension has declined. Even generous public sector pension look under threat.

10. What goes up also comes down
Shares prices can plummet, house price can fall, and interest rates can tumble – as well as rise sharply too. It's best to plan for such eventualities. They almost always happen.

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