What You Need To Know About: Capital Investment

31/01/2014

This week we are focusing on some of the unique aspects of investing a lump sum. Whether it is an inheritance, proceeds from a savings plan, selling a property or business the following should be useful…

Whenever you are investing into real assets which is pretty much anything apart from an instant access bank account, you need to be prepared to invest for a minimum of five years. There are several reasons for this: you need to give the investment a chance to recoup the costs of investment and generate a return in excess of inflation, typically the longer you invest for the better your chances of achieving this. You also need to consider investment timing. If you are unfortunate enough to invest at the peak of the market, you may need several years before your investment returns to its former value. The chart below shows the value of the main UK equity market index: FTSE 100 since launch (Dec. 1985 to 17-Jan-14):

UK FTSE 100 Dec'85 to Jan.'14

As you can see there are periods of significant growth such as the dotcom boom of the 1990’s followed by 3 years of declining markets and the subsequent recovery between 2001 and 2007 followed by the Global Financial Crisis (GFC) and sharp pick up in values from the middle of 2009. All stock markets have these cycles and whilst there are other types of investment, equities are the most talked about in press coverage, so it is easy to get swept up in the headline grabbing sound bites preaching that the end of the world is nigh.

To make money on any investment an investor must remain rational: buy low and sell high. However, all too often fear grips investors and they make irrational decisions. In his industry standard book,’The Intelligent Investor’ Ben Graham anthropomorphizes the market, describing it as a manic depressive, suffering irrational highs and lows. Not getting caught up in the hype surrounding a stock market crash is difficult. Resisting the urge to sell once the market has gone down is very hard but essential if you are to make a profit.

TIP: When investing, make a note of the reasons you invested and keep it somewhere safe. In moments of crisis or doubt look at these points again and check that they are still true.If you have invested for the right reasons these notes will help you considerably. And, as Baron Rothschild, an 18th century British Noble and member of the famous banking family, is credited with saying; ‘Buy when there’s blood on the streets…even if it is your own.’ In other words if it was a good investment at the higher price you bought at logic says that there is even more chance of profit at the lower price, so you should buy more. .