Understanding the Stock Market: Take stocks for the long term

In the last column in this series, John Andrew summaries the main factors to examine when investing in shares

When this series started last September, the Footsie stood at 4,369.7 compared with 5,928.3at the close of business on Thursday night. Towards the end of October, while Understanding the Stock Market was exploring the reasons why share prices fluctuate, the London market was in a state of shock.

A couple of days previously, the Footsie had suffered its largest fall in five years, closing at 4,991.5. The cause was a spectacular fall in the Hong Kong market. There was no stock exchange in the world that did not suffer from the shockwaves originating in the Far East.

This demonstrates why investing in shares is not for the faint-hearted. If you suffer a sleepless night every time there is a hiccup in the market, shares are not for you. But many fortunes have been made shares.

Take the case of Gladys Holm, a secretary in Chicago who never earned more than pounds 9,000 a year. When she died, aged 86, she left pounds 12m to a children's hospital. She had amassed her fortune from astute share investment. But fortunes have also been lost in shares. So, why invest if there is the possibility of losing money? The simple reason is that, historically, in the long term, shares have outperformed investing in savings accounts.

This is not to decry such accounts, which must form the basis of every investor's strategy. No one should even contemplate investing in the stock market if they then would not have a comfort level of savings.

The exact amount depends on individual circumstances. However, as a quick rule of thumb, the minimum should be at least six months' expenditure.

It is also essential to review your attitude towards risk and evaluate the level of funds that you want to invest in the stock market. If you have a sizeable lump sum, seek guidance from a broker. However, if you will be investing surplus funds as and when they arise, you can turn your investment into a pastime.

It is important to remember that it is not a game. Any investment in shares must be viewed as a medium to long-term investment - this means for at least five years. Of course, changes in one company's circumstances may make switching to another with better prospects worthwhile. But, generally, it is only over time that investments will absorb dealing costs. Hiccups in the market also tend to have less impact the longer the investment is held.

The second point is to spread your risk. Opinions differ as to the ideal number of companies in which a private investor should hold shares. Some say 10, others as many as 20. ProShare's chief, Gill Nott, recommends: "As a very general rule, you should aim to have shares of at least six different companies in your portfolio at any one time. It is wise to buy shares in a number of different companies in different sectors, so if one share or sector performs badly, this will be balanced by the performance of the others."

The third point to remember is that share investment is not an end in itself. Keep abreast of the financial news and monitor the progress of your shares. If you become a real enthusiast, you may decide to keep files of cuttings not only in those companies in which you have investments, but those in which you are considering investing.

Finally, keep records. Retain contact notes, dividend tax vouchers and the other details you will need to complete your tax returns. Following the stock market can be an absorbing and profitable pastime. Hopefully, it will be so for you.