NEW YORK SHARES

By Dan Hyde

PUBLISHED: 17:58 EST, 17 July 2012 | UPDATED: 07:04 EST, 18 July 2012

Investors have suffered for five years and there’s no end in sight. But don’t despair...we explain how even in stormy markets you can steadily build a nest egg.

Long gone are the days of easy double-digit returns on investments and juicy 8 per cent interest rates on savings accounts.

But reinvesting dividends, hunting for hidden gems or growth industries and keeping an eye on charges can all give your investments a turbo boost. Dan Hyde explains how you can set your investments to work to make you money.

think will take advantage of a growth industryGoing green: David Osborne and his wife Margaret invested 5,000 for their eldest son in Jupiter Ecology

In July 2007, getting a juicy return on savings was a doddle. Cash savers could get as much as 8.1 per cent a year on the High Street in Abbey National’s Super Bond.

Investors had seen 1,000 put into UK shares in July 2002 grow to 1,979 in five years. But, since then, that 1,979 has grown by just 20.

Savers who had 1,000 in a company pension in 2007 have earned just 13.60 a year on average — or 68 in total.

Even investors who ploughed their hard-earned cash into the most popular funds have been let down.

The 7.4 billion M&G Recovery fund has added just 92.70 to each 1,000 invested over the past five years, according to Morningstar. Savers who plumped for Fidelity Special Situations — which up to 2007 had been a success story for three decades — have lost 10.80 on each 1,000 invested.

ANOTHER DECADE OF DISMAL RETURNS

Experts believe stockmarket jitters will linger for some time.

‘Markets could well be choppy for the next decade,’ says Darius McDermott, managing director at fund broker Chelsea Financial Services.

Bank of England governor Mervyn King has warned we aren’t even halfway through the financial crisis. Interest rates — already at a record low 0.5 per cent — could be slashed to zero to help. That would heap more pain on cautious savers who stick to High Street banks.

Property prices — a key gauge of our economic strength — will stay flat for at least 12 more years, claim accountants PricewaterhouseCoopers.

And across the Channel, the European debt crisis could drag on for another two decades, according to economist Wolfgang Munchau at Eurointelligence.

Even the rapid growth in China has slowed recently. Investment experts say investors must face the music: the next few years are likely to be bleak.

‘We’ve had a huge party for 15 years and governments spent too much,’ says Mark Dampier, head of research at independent financial adviser (IFA) Hargreaves Lansdown. ‘The harsh reality is that in the UK, U.S and eurozone, nations have run out of money — it’ll be tough for investors to make good returns for years.’

Tom Stevenson, at investment house Fidelity, says: ‘There will be a boom, but it’s some way off. The key question investors need answering is where to turn in the meantime.’

REINVEST DIVIDENDS AND PLOUGH YOUR PROFITS BACK IN

Even when the stockmarket is flat, you can keep making money.

The way to do this is by putting the annual dividends companies pay out every year back into your fund. This is called reinvesting your income.

A dividend is a slice of profits a company dishes out to shareholders, usually on a regular basis. The biggest dividend payers are large, reliable firms well set to weather economic storms.

Between January and March, UK companies paid out 18.8 billion in dividends, according to Capital Registrars — a 25 per cent rise on the same period last year and a new record. If you reinvest this income, it can have a staggering effect on the value of your nest egg.

Research by Barclays Capital shows that 100 invested in 1945 in UK shares would have grown to 7,400 by February on its own. But if you had reinvested the dividends, it would be worth nearly 131,500.

National Grid, Vodafone and GlaxoSmithKline have all recently bumped up their dividend.

But rather than taking a punt on a handful of shares, a better option might be an equity income fund, which invests in many of these firms. Each fund has a ‘yield’, which is best compared to the interest on savings. It’s usually presented as a percentage of the share price. The higher the yield, the more income you get for your money.

On average, UK equity income funds have paid out 4.5p a year for every 1 invested.

Make sure the money is reinvested automatically to grow your pot. This dividend has helped equity income funds outshine rivals purely focused on growth over ten, 15 and 20-year periods, according to FE Trustnet.

EXPERTS INCOME FUND PICKS

Mark Dampier, of Hargreaves Lansdown, recommends Marlborough Multi Cap Income for adventurous investors. The fund was launched a year ago and has a yield of 4.17 per cent. It pays out twice a year and total expense ratio charges are 1.55 per cent annually.

It is focused on small and medium-sized companies — which makes it more risky. But it means their dividends can rise fast.

One of the fund’s biggest holdings is cinema chain Cineworld. The big screen attracts up to 20 million film fans a month across the UK — and with the new Batman, James Bond, Jason Bourne and Spider-Man  films out this year, ticket receipts are set to soar. Other companies among the 135 it invests in include Frankie & Benny’s and Garfunkel’s owners Restaurant Group, and Britain’s biggest seller of mixed cases of wine, Majestic.

Mr McDermott likes Invesco Perpetual High Income for more cautious savers. The giant fund is managed by Neil Woodford, who prefers the safety of big companies such as GlaxoSmithKline, BT and British American Tobacco.

The fund has boosted nest eggs by 74 per 1,000 in a year, making it one of the top performers of its kind. On top of this, its average yield is 3.91 per cent. It charges 1.69 per cent a year. The fund is not big on banks — which many savers see as a bonus, though until recent years they have been big dividend payers.

Newton Asian Income and M&G Global Dividend are worth considering for bolder investors looking outside the UK, says Mr McDermott.

Newton Asian Income invests in big companies such as Sands China, which runs five-star hotels complete with bustling casinos in Macau, just off mainland China.

The fund’s average yield is 4.99 per cent and it charges 1.66 per cent a year.

Money in the M&G fund is spread into the U.S., Australia, Switzerland, and Brazil, where companies are required by law to dish out 25 per cent of their profits as dividends. It is heavily invested in Nestl, the 145-year-old Swiss makers of KitKat and Smarties — which runs the old Rowntree’s chocolate factory in York. Other big stocks include the U.S. supermarket giant Wal-Mart, which owns Asda in the UK. The fund’s average yield is 3.6 per cent and it charges 1.68 per cent annually.

THE DANGER OF DIPPING IN AND OUT

Unless you are a professional investment fund manager, you are highly unlikely to be able to time the ups and downs in the market — so don’t even try.

Even fund managers regularly get it wrong. The worst tactic is chasing racy, high-risk shares hoping for a quick buck. Another is jumping in and out of the stock market as it flitters up and down.

Figures from fund managers Fidelity show that 1,000 invested in the stock market in 1997 would have grown to 2,014 by the end of May this year. But if an investor missed the ten best days by trying to second-guess the market, the return would have been only 1,090.

It can pay to trickle your money into funds in a slow, regular pattern, says Jason Witcombe, an independent financial planner at Evolve.

This smooths returns and allows for the inevitable dips. ‘You have to look at your own time horizon when investing,’ he says. ‘Unless it’s something such as an extension on the house, most people are saving for retirement, which could be several decades away. ‘This means you can afford to take a little more risk.

‘But always try to drip-feed investments because it takes the emotion out of your decisions.’

You have to remember why you chose a certain investment, and stick with it. When the price falls you’ll end up buying more of a certain stock — so you’ll be even better off if it rises.

‘I’ve stuck to big names paying dividends’

Planning ahead: Father-of-two Bob Mennie, 48, is well-prepared if stock markets wobble for another decade

Father-of-two Bob Mennie, 48, is well-prepared if stock markets wobble for another decade.

Bob, a trained accountant, is heavily invested in dividend-paying stocks such as Vodafone, Royal Dutch Shell and Unilever, through his own online share-trading account at Selftrade.co.uk. ‘The markets are going through a tough time and I can’t see share prices going anywhere fast,’ he says.

‘I’m making sure that I protect  myself by focusing on income and I’m sticking to big, blue- chip companies.’

South African-born Bob (pictured with his children Helena, three, and Charles, six) can call on his previous experience as a stockbroker before he moved to West London 17 years ago and married Bridget, 42.

‘I’m being a bit more cautious with my Isa and hold nothing outside the FTSE 100,’ he says.

TAKE A RISK ON HIDDEN GEMS AND EMERGING MARKETS

Enter the dragon: China's growth is slowing but it's growing middle-class' desires are proving rich pickings for some firms

Investors looking for a little more fizz from their funds should turn towards emerging markets.

These are fast-growing economies with bags of potential, such as India, China, Brazil, Russia and Mexico. But be aware that this means taking more risk with your money.

The average emerging markets fund is down 128 on every 1,000 invested over the past year.

Some funds — such as Hexam Global Emerging Markets — have lost 30 per cent.

However, over five years, investors have made 218 on average for each 1,000 invested. Over ten years, 1,000 has grown to 2,339.

The recent emerging markets slump is partly down to fears over a slowdown in China’s economy.

But the upshot is a golden opportunity to buy funds on the cheap, says Philip Poole, head of investment strategy at HSBC Global Asset Management.

‘We’ve had a period where emerging market investors have sold up,’ he says.

‘While prices could go lower in the short-term, the return over ten years should be very good.’

Dan Morris, a global strategist at JP Morgan Asset Management, says: ‘Growth prospects are as good as they’ve always been, while the risk of crises in Asia and Russia has fallen.’

The argument for investing in the so-called BRIC nations — Brazil, Russia, India and China — and Mexico has not changed.

Most have young, booming populations, a growing demand for goods, are rich in natural resources and can pump out cheap exports. India’s bulging middle-class of 330 million, for example, is spending at such a rate its economy has grown  8.5 per cent a year for the past five years, compared to just 1 per cent in the U.S.

Adrian Lowcock, of IFA Bestinvest, recommends First State Global Emerging Markets Leaders, which has turned 1,000 into 3,417 in ten years. It charges 1.58 per cent a year.

Fund manager Jonathan Asante puts more than 40 per cent of investors’ cash into Asian stocks, including President Chain Store, a chain of Taiwanese convenience shops.

He also backs companies in Africa to grow. Shoprite Holdings, Africa’s largest food retailer which sees  58 million customers go through its checkouts, is among his picks. Like many emerging market fund managers, Asante also invests in UK and U.S. companies that have strong presences abroad, such as Dove soap and Marmite maker, Unilever.

WATCH OUT  FOR CHARGES

Always check the charges before you save into a fund. Most have an initial charge in the region of 5 per cent.This means 5 from every 100 invested goes to the manager.

However, many online investing websites waive this fee. [Read our guide to the best and cheapest fund, investments trust and Isa investing platforms]

More important is the rolling annual cost. Look for the words ‘ongoing cost’ or ‘total expense ratio’.

This shows the total amount of money that is taken from the fund every year. This typically varies between 0.5 per cent and 2.5 per cent — in other words, between 50p and 2.50 on every 100 invested.