It is possible to make huge profits from the stock market. Not only possible, but easy. All you have to do is aim to get rich slowly instead of wanting to get rich quickly.
I’ve pointed out before that regular savings is a virtually guaranteed way of making money from the stock market provided you give it ten years. The ‘cost averaging’ effect means that even when share prices do down, you can still make money.
Over the 8 years since October 2000, the FTSE 100 Index is down from 6500 to 5100. But in fact, if you’d invested £10,000 in October 2000 in an index-tracking investment fund, you wouldn’t be losing money. Though the index has fallen 21%, your investment would be worth £10,300 today assuming you had reinvested all the dividends the fund received over that period.
But contrast that with the position of someone who invested £100 per month starting in October 2000. Their total investment of £9,600 would now be worth £11,000, giving them an annual return of 4% on their money. If the FTSE Index goes back up to 6,000, the annual return will be over 8%.
Volatility plays a key role
These figures still seem low, but now look at what can happen if you pick a really volatile investment. If you’d put £100 per month into JPMorgan’s Emerging Markets fund over the past five years, your £6,000 investment would now be worth £9,088, giving you an annual return on your money of a whacking 16%.
Over that same period, £100 per month into a fund that tracked the FTSE 100 Index would have produced just £6,584, a return of under 3.5% a year. So the highly risky, highly volatile investment can really pay off in a regular savings plan.
Give it a bit longer and you start talking about really serious money. £100 per month saved into JPMorgan’s Natural Resources fund over the past ten years, a total cost of £12,000, would now be worth an astounding £37,800, giving you an annual return on your money of just over 20%. Over that same period a fund that tracked the UK stock market average would have delivered just £14,480 for the same £12,000 investment, an annual return of just 3.5%. Once again, the highly risky, highly volatile fund delivers the big payoff.
High risk for a reason
While you can’t argue with these figures, they do present you with the problem of choosing a high-risk, volatile fund to save with for the next ten years. It’s unlikely that natural resources will deliver the same payoff again, so what is the next big thing?
This isn’t so easy. Very few people picked JPM Natural Resources ten years ago, when the prices of most natural resources had been stable or falling for years. It was only after 2001 that the resources sector took off and the fund started to motor.
That of course is one reason why the savings plan has paid off so well. You had several years to accumulate natural resources investments at low prices before the fund took off. So the trick is to find a ‘sleeper’: a fund that is plodding along but invests in a sector that suddenly takes off.
There are always a few candidates for the next big thing, and I’ve listed a few. I don’t know which of them will produce a really big payoff over the next decade but I feel confident that at least one of them will.
Diversification is key
You don’t have to put all your money into one fund, though. With a fund supermarket, you can put £50 per month into several funds. I’ve previously suggested a regular savings portfolio that includes both low-risk and higher-risk funds. But here are a few more high-risk options that I think could produce fireworks at some time in the next decade. You could include several of them in a regular savings plan and if just one of them produces figures like JPM Natural Resources has over the past decade, you should be happy enough.
Ride the elephant
India. A huge country, an emerging market that has a better framework of law and regulation than China and an economy that is expected to grow at 6% a year or better. Jupiter India was launched in February; its manager Avinash Vazirani has lots of experience. The fund price is down 10% since launch in February 2008 but that compares well with the larger drop in the Indian stock market.
Profit at new medical frontiers
Biotech. It’s been the next big thing for almost ten years but has never quite made it. This is partly because it’s taken so long to create practical applications of giant medi-tech breakthroughs like the human genome project. But there are promising signs. AXA Framlington Biotech ‘s manager Deane Donnigan is highly rated, but the fund price has gone sideways for over 5 years. Its day will come.
Get building in Asia
Asian Property. The commercial property market in Asia is developing at a cracking pace to meet the needs of booming economies. It’s highly volatile and will almost certainly see ‘boom and bust’ cycles, but if you can time your exit on a boom a savings plan with First State Asian Property Securities could pay off handsomely.
To Africa and beyond
Emerging markets. The big ones like China and India won’t be emerging at all in ten years’ time – they will have joined the mainstream. But markets in Africa and South America could be the next to generate big returns as they progress. JPM Emerging Markets and Aberdeen Emerging Markets both have good records and their managers will be looking for the next winners.
Clean up from the environment
New technology. The race is on for new technologies to slow global warming and help us live sustainably. After a big boom in alternative energy, there’s been a slump, and this sector could be a sleeper for a while, but there surely will be another boom. Jupiter Ecology has been going for 20 years and manager Charlie Thomas has seen several waves of enthusiasm for the environment come and go. An alternative is Schroder Global Climate Change, launched in September 2007.
Important risk warning - please read
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.
