Back to basics – Why Invest in Shares

The purpose of investing: To grow wealth over time.Gold Coins and plant isolated on white background

Why shares? It’s the preferred ‘financial instrument’ because its proven time again to be the best long-term investment – outperforming bonds (loan stock), property, cash deposits etc

Two components of return in shares:

-Annual income (dividends paid out of profits, usually distributed twice yearly)

-Capital growth (appreciation in the value of shares)

Shares or investment funds? I remain committed to the belief that the best way for the average investor to gain exposure to the stockmarket is through a pooled investment. This is a diversified portfolio looked after by a professional fund manager, where the money is spread across companies, sectors and countries.

Advantages –

Investors with a small sum to invest can gain exposure to the stock market through a stake in a well diversified fund.

Diversification reduces risk and ‘economics of scale’ in share dealing/admin reduces costs.

Moreover, investors take advantage of professional management.

Attractions of an Equity Income Fund

An equity income fund manager searches for companies paying attractive and growing dividends. The beauty of this philosophy is that it goes back to the basic principles of investing – that you receive a share of the profits companies choose to distribute as dividends.

Dividends can be reinvested to compound returns – buying more shares with your dividends and in turn receive even more dividends. It’s a tried and tested way to build wealth.

In addition, recurring dividends provide first-class compensation while you wait for the market to appreciate. You can therefore spend less time trying to second guess the economy, and less time concerning yourself with roller-coaster ride of the stock market.

Folly of Market Timing

Peter Hargreaves, co-founder of Hargreaves Lansdown, one of the UK’s largest fund supermarkets highlights the folly of this flawed strategy.

He describes it as a utopian philosophy for inaction. People who endeavor to time the market always believe the market will go lower when it has bottomed and never invest. Plus when the market turns a corner, they believe it has risen too far and so refuse to invest again.

The result – perpetual inaction or being sucked in at an expensive price.

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