Pause before you take the plunge
March 2009
There’s more to investment than just shares. So, with your financial adviser, take a long hard look at the other ‘asset classes’ such as bonds, property and cash - and decide what mix is right for you.
Let's assume you have settled on shares.
Before you dive in, check out what you are getting yourself into. First off, which company do you choose? There are over 800 listed companies on the UK stock exchange alone and, of course, there are stock markets all around the world - the Dow Jones in the US, the CAC in France, the DAX in Germany and the Nikkei in Japan, to name a few.
Then, as you are probably aware, buying shares in just one company is extremely risky, so you would probably be better off spreading your risk and buying the shares of more than a few.
Remember what your granny said: ”don’t put all your eggs in one basket”. If you want to gain a better understanding of the importance of diversification – go to our Eggs in one basket feature.
Next, currency movements make overseas shares potentially more risky than investing in home grown companies. Similar to tourist currency exchange rates, there are times when the £ buys more or less of a certain currency - meaning that your shares can be worth more or less in line with those fluctuations in addition to changes in their market valuation.
Now, what type of companies should you invest in? Fast moving stocks that could race ahead or fall by the wayside? Or do you favour mature, established companies who might be a little staid, but promise solid growth and, even in today's uncertain environment, the prospect of regular dividends.
Another question: when should you invest? Markets are cyclical and nobody can predict when a market will peak or plummet. Today’s greatest gains could be tiny software companies, tomorrow may be the turn of the giant global banking corporations.
Finally, should you be investing in shares at all? There are after all many other ways to invest which, while they may not provide the thrills, can certainly help you avoid the spills of the stock market.
There are answers to all these questions. In fact, more answers than questions. For once you have decided on your investment strategy, the opportunities really open up.
So before you take the plunge, take a serious look at other major asset classes - fixed interest securities, commercial property and cash.
A blend of these types of assets together with a mix of shares may well be your best bet. But, as with all these decisions, you may want to speak with your financial adviser.
