Risk

People seem to hate taking risks with their money.

When I tell people I like share dealing they often look very unimpressed, as though they are secretly thinking that I am on some get-rich-quick scheme or just plain gambling.

Share dealing is not gambling. When you gamble you are always (or nearly always) going to lose out to the bookmaker in the long run. When you invest you normally make money in the long run as long as you are sensible. By making gains you are sailing with the wind, not against it.

Most books I read that introduce share dealing contain sections about managing risk. Readers are advised to spread their portfolio between bonds and stock, and to make sure that their portfolio is well diversified. They are advised to start off with investment trusts if they do not have enough money to invest in five separate companies.

I think most of this advise - though well meaning - is rubbish.

Shares are proven to be the better investment over long periods of time compared to bonds. (This is an over-simplistic statement I know!) If shares are better than bonds then put 100% of your investment money into shares! If you think that the market is about to crash then that is different but to have part of your portfolio in bonds when you think the stock market is looking rosy is nonsensical.

It is good to diversify your portfolio. I think 5 to 10 companies are enough though. I mean how many companies do you have time to really research and follow? Should the companies all be in separate sectors? Not at all. If you think one sector is going to do well then make your portfolio overweight on it. You can't be an expert on all the sectors anyway. My sectors of choice are: telecoms, internet, and airlines. My riskier choices are normally in these sectors as I understand them better.

What about starting off with investment trusts? Well when I started off I bought shares in just one company. As it happened my selection did OK but the point is even if it hadn't I would have learnt a lot more about share dealing than if my money had been locked away in an investment trust. Surely the first few years of share dealing are as much about learning as making gains?

Share dealing is supposed to be fun. If you are petrified that your stock are going to plummet then you should put your money in an index tracker. On the other hand if you enjoy the uncertainty of not knowing how much you will have made (or lost) by the end of the year then share dealing is for you.

Life is too boring when you know exactly what the future holds!