Steady return available for patient investors

Nov 20 2010 by Alok Dhanda, The Journal

Alok Dhanda explains why investors should avoid following the crowd when it comes to finding the best investment opportunities.

THOUSANDS of UK investors have been missing out on some very positive returns through being too cautious and following the crowd.

This trend is nothing new. In 2000 for instance, the dotcom bubble took off, which saw people buying technology funds at its peak, only to be very quickly disappointed when the dotcom crash happened. Then in 2005-2006, everyone jumped on the bandwagon by buying commercial property funds, only to be landed with more disappointment.

At the back end of 2007, when the Northern Rock crisis broke, the FTSE 100 index started to fall and thousands of people panicked, selling their investments in a catastrophic snowball effect.

However, it has not been all doom and gloom. The FTSE 100 index has been steadily climbing, and has gone up by more than 50% over the last 20 months, so those who were brave enough to stay in the market are now seeing good, steady and profitable returns.

The lesson we should learn is not to panic when it comes to investing money. The economy is finally growing and the FTSE 100 index is currently hovering between 5700 and 5800, so now is a fantastic opportunity to buy shares again.

Interestingly, 70% of all the FTSE 100 index’s earnings come from abroad. It is for this reason that David Cameron has recently travelled to China and Barack Obama visited India two weeks ago.

Over the years, the most successful investors have spent time drip feeding their funds into the market, to capture its high points and low points, in a process known as pound cost averaging. The key point about pound cost averaging is that you invest on a regular basis.

Pound cost averaging takes the worry out of investment decision-making – you do not need to panic when the markets fall because you will merely be buying more of your chosen investment, and because you are committing funds on a regular basis you need not worry about investing all your savings at the top of the market either. Investors who have respected this need for time and patience have seen some staggering returns. One of the most successful investors in the world, Warren Buffett, stands by this method.

However, it is a common misconception that you have to be very wealthy to invest in the stock market. As little as £50 a month can be invested, and there are plenty of opportunities for those who do not want to take too much of a risk with their money. Stocks in the UK are currently very cheap, so now is the time to take advantage of that, particularly as other sectors such as property are experiencing problems.

Funds with a good reputation at the moment include the Black Rock Gold and General Fund and JP Morgan’s Natural Resources Fund, which has been up by more than 100% since the beginning of 2009. UK Equity Funds are another useful investment opportunity as dividends are making a comeback, and some FTSE 100 index companies are currently paying over 5%.

Investing in stocks can earn a better rate of return than UK banks and building societies, whose average rate of return is currently only 0.1%.

So take some time to consider the opportunities on the stock market. Alternatively, the emerging markets like China and India offer some fantastic funds to invest in. Make sure you seek the advice of an independent financial adviser, who will help you find the right investment funds for your circumstances.

:: Alok Dhanda runs independent financial advisors Dhanda Financial. He can be contacted on 0191 255 8960, email: info@dhandafinancial.com  or visit the website www.dhandafinancial.com