The Wise Investor
"Next, we have the issue of volatility of prices. Shares
are the most volatile of the three sectors, followed by
property which is less volatile, and then interest-bearing
deposits which have no volatility at all.
Share prices are volatile because the profits of the
companies vary drastically from year to year, and property
prices are more stable because the rental income is fairly
stable from year to year.
Remember that the prices are largely based on the
income and profits that the investment returns, and if the
income changes drastically, then so will the price. One final
point on volatility.
We have discussed how some fixed-interest investments
can be bought and sold before their term expires. Ten year
government bonds are a classic example of this. The prices
of the bonds, however, vary daily with changes in interest
rates and expectations of the future.
If you buy and sell bonds or other fixed-interest
investments, Kate, then you should realise that the prices
can be quite volatile.
If you simply keep your deposits for the full term, as I
recommend that you do, then the returns are fixed and the
volatility is zero. The next issue I would like to canvass is the
minimum amount required to invest in each of the sectors.
This is a significant issue for small investors such as
yourself. Before we look at each sector, however, we
should revisit our old friend the investment trust.
By investing in trusts, the small investor such as yourself
can invest in any sector she wants to. This includes a whole
variety of specialist trusts that invest in particular sections of
the different sectors.
If you have saved a month's salary, Kate, then you
should be able to invest in anything you want to by using a
This the first major advantage of investment trusts.
The second, is the easy access to your money, which we
will cover shortly. Now, the interest-bearing deposits.