posted 08-02-2003 08:23 AM         

Despite ups and downs, hundreds of thousands Australians have made investments in the world's stock markets, either directly or through funds managed by professionals. Shares carry greater investment risks than bonds or money market investments, but historically, they have also realised higher rates of return over longer holding periods. Statistics show that the long-term reward of exposure to shares can be substantial, with time smoothing out periodic setbacks to produce attractive returns.

Among the important reasons private investors give for investing in the stock market are the desire to beat the return on savings on deposits and the need to keep ahead of inflation. The downside is that, when deciding to invest in shares, investors must weigh the potential risk of loss of capital against the risk of not meeting their investment goals or of losing purchasing power to inflation.

Managing risk

One of the biggest attractions that equity funds offer investors is the possibility of enjoying good returns while professionals manage the risk. Investment funds are structured so they can diversify their exposure among shares of many different companies. Investing in just one or two shares is generally much more risky than buying shares in dozens or more companies. By holding shares of different companies in several industries or sectors investment funds can reduce the likelihood of a damaging loss through a price decline in the shares of one or two companies.

You can also select investment funds that enable you to allocate assets according to a planned programme that matches the risk you are prepared to tolerate to the feasible rewards you would like to achieve. There are many specialist financial advisers that can help in this area.

Such diversification usually means spreading investments through a variety of investment classes including not only shares, but also bonds and money market vehicles. For those concentrating on equities, staying invested long-term despite periods of market turbulence can also help reduce risk of loss. The volatility, or sharp movements up and down, of the stock markets tends to be smoothed out over longer time frames. For investment purposes longer term may mean between five to ten years, or more.

Market returns

Although stock markets have bad months - even bad years - statistics show that, in the medium and long term, they provide better returns than bonds or cash. That is why there is universal agreement that stocks and shares comprise the best medium to provide long-term capital gains for investors.

The volatility of the stock markets has failed to dent the effectiveness of equity investment over the medium and longer terms. Income from equities over the past 30 years has comfortably out-stripped inflation. This means that investors in equities have enjoyed opportunities to increase the value in their capital.

Investing in equities is relatively straightforward. Hundreds of fund managers offer thousands of funds combining the potential advantages of professional money management, the attraction of lessening risk through broad investment holdings, and the facility to buy and sell shares quickly.

Important considerations

You should think of equities as investments for the medium to long term. This means periods of at least five years and, preferably, more than 10 or even as long as 20. If you cash in equity investments when markets are low, you could lose money. Longer investment time frames enable you to choose times that might be more favourable to you.

Equities are central to the strategies of many people hoping to build worthwhile savings for retirement. But they are also the key to the ambitions of younger people who wish to build wealth to enjoy in their 30s, 40s and 50s.