Diary of a private investor: ignore shares and get poorer
Our private investor is back - and he says that savers who are prepared to take some risk will prosper.
Our private investor is back - and he says that savers who are prepared to take some risk will prosper.
10:51AM BST 06 Jun 2011
After the glorious year of 2010 - for the stock market anyway - this year has, so far, been a damp squib. First it was up, then it relapsed, then it rose once more before retreating again. As I write, it is within 2pc of where it started.
As Lady Bracknell said in The Importance of Being Earnest, "this shilly-shallying is absurd". Which is it to be? Will shares finally rise or fall?
On the bearish side, I'm told, by people who ought to know, that Greece is bust, whatever the politicians say. Another well-placed individual has the same opinion about Ireland.
If either is right, shares could fall heavily on the day the default is announced. Some people say "it is already in the price", but I doubt it.
On the other hand, shares still look good value. I own some in BP which, at 458p, stands at a mere 6.8 times forecast earnings for 2011.
Its adventures in Russia do worry me a bit and, of course, the shadow of the disaster in the Gulf of Mexico still hangs over it. But rarely in its history have the shares been treated with such disdain.
Professional and lifelong investors are now generally back in the stock market. But many private individuals are still holding back.
Over the past few years, I've talked to quite a few people about their investments and found they can be divided into four sorts.
The first thinks shares are too risky. They remain almost entirely in cash. In some cases they have good reason. Some have a limited amount of money and a very specific thing - such as school fees - which they want to be sure they can pay.
Others argue that shares are unpredictable and they don't know anything about them. Better to keep the money safe in the bank. These people have their reasons. But over the long term, I've seen so many of this sort, who were once well off, become very gradually much less so. I knew the daughter of a Seventies multi-millionaire who inherited her fair share. She kept the money in a building society and is now, frankly, just getting by. It's frustrating. She could have stayed rich.
The second group consists of those who have made quite a bit of money but have not had much time or interest in managing it. They were then persuaded by persistent, charming salesmen to invest in certain funds. For these salesmen, nothing was too much trouble. They visited them in their homes. They brought wonderful, sophisticated brochures and "personalised" recommendations.
The untold story which the salesmen never quite got around to explaining in detail was the full extent of the commissions and expenses involved. The people in this group have generally had a pretty thin time of it over the past dozen years.
The FTSE 100 is still rather lower than it was in January 2000, and all those commissions have eaten a substantial hole in the dividend income.
The third sort are thrill-seekers. To be honest, I know only one person in this group. There was a time when he got very excited about shares and was dealing on an hourly basis, following recommendations from a broker. After initial success, he lost a bundle and decided to give it all up.
Long-term, persistent portfolio investors are the fourth group. They have built up experience and understanding. They tend to have done best.
But where does that leave the sort of person who has other things to do and does not want to spend time building up experience in shares?
My flippant answer would be "poorer". You make your choices and live with the consequences. Trying to be more helpful, let me suggest this: how about putting, say, 15pc of free cash in a selection of lowest-possible-cost tracker funds? And then increasing the amount each year up to a level with which you are comfortable?
This way, you will not give away a fortune in commission. You will keep most of the dividends. You will not have to worry about selecting individual shares. And you are likely - though not guaranteed - to be richer in 10 years than otherwise. You could go for a mixture of, say, half of the invested amount in a FTSE 250 shares fund, a fifth in a Far East fund, another fifth in a US fund and a 10th in an emerging markets fund.
