Investing in Stock Markets - Financial News Autumn 2007

01 October 2007

It is accepted that over the longer term, investing in the stock market should provide better returns than most other asset classes.

Companies whose shares are traded on the stock market aim to grow, making money for themselves and their shareholders. When you invest in shares or share based funds, you are investing in the potential of those companies to obtain capital growth of their shares, or an increasing dividend income.

The value of shares and share based funds fluctuates daily and many factors will affect what the market is prepared to pay for a share. This could be related to information about the company, issues about the economy in general or simply sentiment.

These fluctuations, or volatility, are what makes investing in stock market related investments risky. In return for taking such a risk, we expect to receive higher returns over the longer term, than investing in low risk cash deposits, which usually provide no growth at all against inflation.

Although the potential for return is much greater because of the inherent risk present in share based investments, we always advise clients to hold a mixture of assets in their investment portfolios. We all have different appetites for risk and this risk can be greatly reduced when you hold a well balanced portfolio of the four main asset classes, equities, fixed interest, property and cash. Derivatives and exchange traded funds are examples of other types of investments which are becoming popular when diversifying a portfolio.

The main benefit of diversification is that, in theory, not all asset types react in the same way to market and economic issues. When the stock market falls, as we saw in August of this year, the loss in value to a well balanced portfolio will be less than a portfolio which is entirely made up of stock market related investments.

As time moves on, it is increasingly important to ensure that your portfolio is reviewed. Investments should be reviewed for their continued suitability for your requirements and the objectives set at outset. Occasionally the allocation of assets held within the portfolio should be rebalanced in order to ensure that your portfolio remains suitable for your objectives and risk requirement. If equities have performed very well, your portfolio will have a higher exposure to the stock market overall and the risk will therefore increase. We suggest that annual reviews of your portfolio would be appropriate.

For more information please contact Ruth Dolan, Taxation and Financial Planner.
 

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