The crash in UK share prices is always presented as bad news. For most of us, it is in fact a guarantee of future profits. Here's how to collect your share.
Over the long term, according to the authoritative annual Barclays Capital Equity-Gilt Study, shares have returned an average of 5% a year on top of inflation - whatever inflation happened to be.
Cash in the bank has returned on average 1% a year after allowing for inflation over the past century. So over periods of ten years or more, you're virtually certain to make more money in shares than any other type of investment, including property.
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Shorter term doesn’t suit lump sum investments
But over shorter periods you can still come out at a loss on lump-sum investments. Take Joe Soap, who invested £10,000 in a UK Index Tracker fund in July 2000, when the FTSE 100 Index stood at 6,300. Today the index is around 5,400 and Joe is 14% down even after holding their shares for eight years. That's awful.
But for people who put money into shares on a regular basis, the story is completely different. Take Jane Doe, who started a regular savings plan for £100 per month in a UK Index Tracker fund in July 2000, the same day as Joe invested his lump sum.
Even though the index is down 14% since she started, the current cash-in value of the £9,600 she has contributed so far is £12,000, showing her a 5.5% annualised return on her money.
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Why regular saving comes out on top
How come Jane has ended up with a £2,400 profit in exactly the same investment, over the same period, while Joe is nursing a £1,400 loss? The reason is that the index has fluctuated substantially over the past eight years, and Jane's regular saving has benefited from it.
It's simple, really. If you invest a fixed sum of money every month, it buys you more investments when prices are low than when prices are high. If you were to calculate the level of the index every month from July 2000 and average all those figures, you'd get the average level of the index at which Jane bought. But in fact, Jane's average purchase cost was lower than that, because her fixed contribution of £100 per month bought more units at lower than at higher prices.
Over the years, this 'cost-averaging' effect provides a virtually guaranteed way of making money. Even if an investment doesn't rise much in price from the beginning to the end of your savings period, the figures I've just cited prove you can still make a good profit provided it fluctuates in value - and almost all stock market investments do fluctuate.
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Buying the best pays off
If Jane had been just a little smarter, and chosen to contribute her £100 per month not to an index tracker fund but to Fidelity Special Situations, one of the top-perfoming funds, the cash-in value of her plan would now be £14,000, giving her an annual return of 9.2% on her money - even over a period in which the stock market has, by historic standards, performed dismally.
The volatility of the stock market, those rollercoaster ups and downs, are what scares most people off investing in shares. But for regular savers, those ups and downs are the source of profit. In fact, you are benefiting from them in your pension plan - almost any pension scheme you're likely to be in is investing regularly in shares to provide your retirement benefits.
I've previously suggested that you take advantage of the rollercoaster-regular savings effect to convert your mortgage into an extra, virtually guaranteed source of profit, by having an interest-only mortgage and a regular savings plan.
See my article on why it pays NOT to pay off your mortgage.
Start drip feeding money into the market now
Now, with the UK stock market in panic mode, I say it's the ideal time to start a regular savings plan. You'll be accumulating lots of investments at low, low prices, and in ten or fifteen years' time you are virtually certain to be sitting on big fat profits.
Don't pay any attention to the short term. Maybe there will be a recession, companies' profits may fall and so forth. But this has happened before and very few big companies have gone bust as a result.
What do you think? Do you think in ten or fifteen years Marks & Sparks will still have its stores on the High Street? Will BP still be one of the world's biggest oil companies? Will BT still be the biggest UK telecoms provider? Will Tesco still be the world's most successful groceries retailer?
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The world is not changing that much, after all
Will Rolls-Royce still be servicing about half of all the jet engines powering all the world's passenger airplanes? Will GlaxoSmithKline still be one of the world's top pharmaceutical companies?
Will Diageo still be the world's number one seller of spirits, Cadbury one of the world's top confectioners? Yes, yes, yes, almost certainly yes, and they'll all be making money and paying dividends to their shareholders.
Most people want to buy things whose prices have gone up. They like to believe that what has happened will go on happening. If you believe that, don't ever become a stock market investor - you will lose money. What has happened recently is very, very unlikely to go on happening - that is what over 100 years of stock market history has proved.
Screw your courage to the sticking place
But even if you see the sense of what I've said, I bet you won't be able to summon up the courage to invest lump sums today, when it's only a matter of time before shares turn around and start going up again. And maybe you shouldn't invest, if it's going to make you anxious and unhappy.
But regular saving gets around the problems of fear, anxiety and uncertainty. Provided you have a 10-year timescale in mind, and pick sensible investments, it's almost impossible to lose and it's possible to win very big. As the professionals would put it, regular savings tilts the risk-reward ratio heavily in your favour: less risk, more reward.
Regular saving into a UK stock market fund really is a no-brainer money-maker. The only question is: which fund or funds?
I have two answers to that. If you really want to buy and forget, choose an index tracker fund.
See our selected UK Index tracker funds
If you want the chance to get higher returns and are prepared to regularly review your fund selections, use a self-select ISA with a fund supermarket and spread your contributions across several funds. This is my current recommendation for anyone planning to save for ten years.
My £400 per month ISA regular savings plan
| Type of fund | Name of fund | Amount per month |
| UK: aims for high and rising income | Martin Currie UK Equity Income | £100 |
| Worldwide: focus on small growth companies | Rathbone Global Opportunities | £100 |
| Natural resources | JP Morgan Natural Resources | £100 |
| Worldwide commercial property | SLI Select Property | £100 |
| TOTAL | | £400 |
I believe you will make more money using my selected funds, but you may need to change them in the years ahead, so this isn't a 'buy-and-forget' option - for that, stick to an index tracker fund.
More information about my selected funds
Source of performance data: Financial Express. Offer to bid prices with net income reinvested.
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.
