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You need a thick skin to be an investor

Stocks and shares graph

While bartering for a cut-price telly or a holiday at a budget price can leave you satisfied for months or years after your negotiation, bargain hunting for shares is fraught with danger for investors.

Few things beat the feeling of getting a real bargain. But, no matter how big the company, shareholders need to be prepared for a bumpy ride.

Tesco shares have fallen in value by more than 35% so far this year. Shareholders will have found themselves wincing at the business pages on a regular basis, wondering when the bad news is going to stop. Profit warnings, departing CEOs and a chunky cut to the firm’s previously impressive dividend have all added to a bleak outlook for the supermarket giant.

This week, Tesco revealed that it overestimated its half-year profit projection by a staggering £250m, causing a further dramatic share price decline.

Shareholder dilemmas

So now’s the time to buy, right? Buy low, sell high – isn’t that the idea? That’s what I thought in June, when investing in a marketleading supermarket at a share price last seen in 2004 seemed enticing.

So I bought some shares in my pension and have since watched my investment lose almost 30% in value. Doing my job, it’s easy to become blasé about the various investment clichés that do the rounds in the City of London, so it’s annoying when I’m reminded that they often contain a degree of wisdom. ‘Never catch a falling knife’, in this case.

Fortunately, I have more than 30 years to go until I’m likely to retire, so I can afford to take a very long-term view. However, the case of Tesco, as with those of BP, Lloyds and RBS before it, highlights that investing in even the biggest companies can be a risky business.

Have you ever made a bold investment decision? Did the risk pay off or are you playing it safe from now on?

Comments
Member

Basically it’s a gamble and like all such, intelligent research shortens the odds, but doesn’t stop investments from failing unexpectedly. Eating into any profit are charges for every activity connected with that investment. It’s true that statistics show shares give a greater return on capital, than cash saving, over the longer term, but you do have to have the right ones to benefit. I have neither time nor enough interest to deal in these commodities, but, for the sake of “industry” I’m glad some do.

Member

Hi Vynor,

Ultimately, it’s all about balancing risk and reward and having a long term view.

If I’m investing for my retirement, given my 30 years plus time horizon, I need to invest in assets that have the potential to outstrip inflation and provide the kind of long term returns that riskier assets can – so a balanced portfolio of shares and bonds makes sense.

Thankfully, my relatively modest investment in Tesco shares is part of such a wider portfolio.

Harry

Member

The key to successful investing for amateurs seems to be to find a good IFA who will build up a balanced portfolio and reinvest the dividends to purchase more stocks and shares. Put them into ISAs. There will be a charge by the IFA but my experience has been very positive and I do not begrudge paying a reasonable amount for the work and expertise involved. No one can predict whether an individual stock will bomb or soar, otherwise the professionals would just make fortunes for themselves! Balance, a long term view and don’t rely on them to provide cash when you suddenly need it – that’ll be when the market is at the bottom.

Member

I don’t disagree with any of that, Malcolm. Paying a good IFA can be the best investment you ever make. DIY investing can work, as long as you follow the sorts of principles an IFA will work by – of course, this requires confidence, time and plenty of research.

There’s also evidence that many investors combine the two approaches – using an IFA for the bulk of their assets, with a small pot to invest themselves on the side.

Member

The advice I was given by my late son who worked in banking was “If you have a little spare money that you don’t need now, invest it in the stock market for the longer term.” I took his advice and it paid off but sadly he is no longer here to witness the results. It is not something I would engage in for the short term however, much wiser to leave it to the professionals and their commission. You have to know what you are doing, how it works and be prepared to take the risks involved if in it for a quick gain in the short term, but good luck Harry, you seem to be well acquainted with the system.

Member

Thank you, Beryl.

Member
NilDesper says:
27 September 2014

Some years ago I joined the Motley Fool and was taken with the idea of a high yield portfolio (HYP). I bought all my shares personally, selecting them using the recommended criteria. The basic idea is to stick to the very biggest companies with a history of rising dividends and totally ignore the current share price. This is a very long term buy and hold policy.

It is important to protect yourself from the vagaries of the business and financial world by diversifying across sectors.

This is a long term policy with no plan to sell any shares at all. I now take all the dividends as income to supplement my pension and have never sold out of a shareholding.

I have lost out on some shares, e.g. BP, when companies have got into difficulties but these very large companies can usually weather any storm over the long term.

The biggest difficulty with this strategy is that some people cannot cope with ignoring share price movements. They are totally irrelevant if you never intend to sell.

My current yield is between 5 and 6% and the income is entirely free of tax.

Nil Desperandum

Member
Jonathan Chiswell Jones says:
24 November 2014

How come the income is entirely free of tax?