With the FTSE 100 at its highest for more than a year, is it safe to invest in the stockmarket, or is it just another false dawn? Money writers weigh up the risks
Rupert Jones and Harvey Jones
The Guardian,
Saturday 17 October 2009
The world's stockmarkets have endured a rollercoaster ride over the past two years.
Rupert Jones is cashing in his tracker
Is it time to cash in my chips and walk away from the table, or should I be brave and keep riding the stockmarket rollercoaster in the hope of even greater rewards?
That's the metaphor-mixing question many small investors will be asking themselves after the FTSE 100 index this week surged to its highest level for more than a year.
It's been a white-knuckle ride. In March the Footsie plunged to 3512; this week it sailed back above the 5250 level. That's a 49.5% increase in only seven months.
Perhaps there's more life in this rally, or maybe it's downhill from here ... who knows? I've decided I'm not sticking around to find out. After years of poor performance, my little nest-egg is looking a bit perkier, so I'm cashing it in. The fact that it means I'll no longer have to write humiliating articles about my "hopeless" investment is a bonus.
There are probably lots of people who haven't looked lately to see how their investments are performing. Perhaps this week's little milestone is a good opportunity to review your portfolio and think about any action you should be taking, such as topping up, selling or switching funds.
Some Guardian Money readers will recall I have written a couple of times about the less-than-impressive performance of my £50-a-month stockmarket Isa with Legal & General – and of my dad's Pep.
Our money is in a supposedly relatively low-risk UK index tracker fund: L&G's UK Index Trust, approaching £4bn in size, which tracks the FTSE All Share index and invests our cash in hundreds of different firms, including many household names. Back in July 2007, my Isa was worth £6,605. By July 2008, its value had fallen to £5,814 (even though it had swallowed up another 12 lots of £50 a month).
In March this year, I was in the slough of despond, bitterly wondering whether the stockmarket was all a big swizz. I'd recently received my statement telling me the fund's value was £4,862 at 22 January, which was less than the total I'd paid into it.
"If I bail out, that will be the cue for shares to motor upwards," I wrote at the time. I didn't bail out – I think I rather buried my head in the sand – but shares certainly did motor upwards. On Tuesday this week, I phoned up L&G to get an up-to-date figure for what my Isa was worth, and was told its value had jumped to £6,895, based on Monday's prices.
That compares with the £5,700 I've paid into it since April 2000, and the £6,145 I'd have if I'd put my £50 a month into an average savings account, according to Moneyfacts.
Perhaps I should take back what I said about "the great stockmarket swindle", but it's not exactly a shoot-the-lights-out performance.
I told my wife that our Isa was now looking a lot healthier. She said she thought we should cash it in, and use the money to pay a chunk off the mortgage. That sounded sensible, but I thought I'd speak to someone who knows a lot about these things. Matt Pitcher, senior wealth adviser at IFA firm Towry Law, says he would probably go along with my wife on this one.
"We would always counsel people to get rid of their debt as quickly as they can before they invest. The sole exception to that is that we wouldn't say get rid of your debts before you start a pension," he adds.
This is largely because you will always be paying interest on any debt, and therefore your investment will always need to give you a minimum return straightaway to make it worthwhile investing rather than paying off what you owe.
I'm fortunate enough to be on a tracker mortgage with a low-ish rate, but interest rates will, of course, eventually start climbing.
I've been "drip-feeding" money into my Isa, as is recommended. However, Pitcher says that while a lot of advisers and fund managers bang on about the benefits of "pound-cost averaging" (basically, investing money in equal amounts at regular intervals), the longer you hold a regular savings investment like mine, and the more the current value grows, the more it turns into a riskier lump sum investment.
He adds that people often get greedy when sitting on gains. For someone in my general position, cashing in my investment and using it to reduce the mortgage "is probably quite a prudent thing to do", says Pitcher.
The advice will be different depending on people's circumstances.
Some people won't have a mortgage or other significant debts to worry about, while others will be investing for a specific purpose (my Isa cash was never earmarked for anything in particular). Someone in that position with a fund like mine may want to consider spreading their cash across several funds or sectors.
A UK index tracker may not sound all that risky, but it was only this week that I realised more than 40% of my and my dad's cash is invested in just 10 companies (including HSBC, BP and Vodafone).
Small investors are trading again, says Harvey Jones
This year's dramatic and unexpected stockmarket recovery has encouraged thousands of small investors to start trading again. A seven-month rally has seen the benchmark FTSE 100 soar by almost 50% to more than 5000, from a low of 3512 in early March.
Trading has now hit levels last seen during the dotcom boom, with 4m deals made through execution-only stockbroker sites between April and June, according to analysts Compeer.
With the economy still shaky, it isn't a one-way bet. But if you're tempted, setting up an account and placing your first trade is easier than you think.
Is it for me? Decades ago, buying shares was for the privileged few who could afford a personal stockbroker. The internet changed all that. Now anybody over 18 can go online for £10 or less.
Getting started is straightforward. With your bank details and a debit card, you can start trading in around 10 minutes with just a few hundred pounds. But you must be aware of the risks, says Ian Benning, product development manager at The Share Centre. "Stockmarkets can quickly fall back down again. Only invest money you don't expect to need for the next five to 10 years."
What are the benefits? The investment industry has always boasted that, in the long term, shares will outperform other assets such as cash and property. But this is far harder to sustain these days, with the FTSE 100 well below its 6930 closing high at the turn of the millennium.
But small investors are returning because the alternatives look much less attractive, says Jim Wood-Smith, head of research at stockbrokers Williams de Broë. "With many savings accounts paying 0% and the property market shaky, shares look much better value."
Plenty of blue-chip companies such as BP, Shell, Glaxo, Tesco and Vodafone pay attractive dividends of 4% or 5% a year, far more than most savings accounts. But equally, you might see the shares slide in value.
How do I find the right account? Choose from dozens of online stockbroking sites, including etrade, The Share Centre, Interactive Investor, Hargreaves Lansdown, Selftrade, TD Waterhouse and Motley Fool. Barclays, HSBC, Lloyds TSB, NatWest and Halifax also offer share dealing.
All charge different fees, so check their rates carefully. Note that one of the bigger players, NatWest, will, from November, double the charges for some telephone share dealing services. If you plan to trade larger sums, look for a website that charges a flat fee per trade. Interactive Investor (iii.co.uk) and Motley Fool (fool.co.uk) charge £10 for UK trades. Selftrade (selftrade.co.uk) and TD Waterhouse (tdwaterhouse.co.uk) charge £12.50. Beware sites that charge higher fees if you trade bigger sums. Hargreaves Lansdown's Vantage fee is £9.95 per online trade, but only up to £500. That jumps to £14.95 between £500 and £2,000, and £19.95 up to £4,000. Over £20,000, it is £29.95. There is also 0.5% stamp duty on all share purchases.
What if I only have a small sum? If you plan to invest just a few hundred pounds, you might do better with a site that charges a percentage commission. At The Share Centre, that is 1% on trades, with a minimum of just £7.50 for real-time trades.
Many sites also offer regular trading accounts, which slash your costs to just £1.50 per trade if you agree to invest a regular sum, typically between £20 and £200, on a set date each month. The Share Centre, Interactive Investor, Motley Fool, Halifax Share Dealing, Selftrade and others offer this option. Many sites offer a discount. Barclays Stockbrokers, for example, charges £12.95 per trade, but this falls to £9.95 if you trade between 15 and 24 times a month, and £6.95 for more than 25.
What to buy? Your choice of account will depend on what you want to trade, says Stephen Barber, head of research at Selftrade. "Most sites offer tax- efficient Isa accounts and sell unit trusts, investment trusts, exchange-traded funds (ETFs), corporate bonds, gilts, covered warrants and self-invested personal pension plans (Sipps)."
Online stockbrokers work on an execution-only basis, ie they don't advise which shares to buy or sell. The Share Centre is a rare exception – its brokers give basic advice. Killik & Co offers old-fashioned personal stockbroking, but with a minimum trading fee of £40.
There is also a rich seam of free information on the web. You can also sign up to share sites such as Advfn.com, Motley Fool (Fool.co.uk), Digitallook.com and Morningstar.co.uk.
Day trading There is no precise definition, says James Daly, investor centre representative for stockbrokers TD Waterhouse. "Some say it is an investor who closes all their positions at the end of each day, but I would say it is somebody who trades at least once a day."
Recent turbulent stockmarkets have been a day trader's dream, allowing them to make big money in rising and falling markets. "We have seen a big increase in the number of clients trading regularly to profit from these movements," he says.
But this is a high-risk form of gambling. "If you get it wrong, you can lose far more than your original stake," Daly warns.
Day trading is exciting but can easily become addictive — and costly.
http://www.guardian.co.uk/money/2009/oct/17/investments-ftse-100
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