INVESTMENTS: Many novice investors have had a relatively poor experience with equities and have learned the hard way that markets do not always rise Clare O'Dea

For decades, well-informed wealthy investors have made steady high returns from investing in the stock markets. Even allowing for market slumps, historically, equities have beaten any other investment over the long term.

Over the past 10 years, for example, equities returned 20.2 per cent per annum, and over 20 years the return was 18.9 per cent per annum, compared to 14 per cent per annum in commercial property.

The share ownership net has broadened considerably in the Republic in recent years with a number of demutualisations, increased employee share options and the high-profile Eircom flotation.

Unfortunately for 485,000 of the 570,000 original Eircom investors who held onto their shares to the bitter end, the experience may have turned them off equities forever.

Even before September 11th, stockbrokers were speaking of a battered and bruised retail market.

Many recent investors have had a relatively poor experience with equities in the past two years, while more seasoned investors have seen difficult times in the past.

What novice investors have learned is that markets do not always rise. There were similar global market downturns in 1991/1992, 1987/1988 and 1983/ 1984.

So what do analysts see in their crystal balls for the coming year? Mr Brian McKiernan, head of the private client division in Davy Stockbrokers, says what is notable about 2002 is the wide range of views on the record.

"Some are very bullish as a result of falls we have already seen in the market and some see further falls to come," says Mr McKiernan.

"There is a 30 per cent difference in the forecasts given by JP Morgan and Goldman Sachs for US equities, for instance. Things are usually much more aligned than that."

One issue upon which all commentators agree is the importance of the US economy and its ability to recover. But if the big investment banks and fund managers can't call it right, what chance has the small-time punter?

You could be forgiven for believing that small retail investors are doomed to be way behind in reading the market and reacting to trends.

Not so, stockbrokers will argue. Look at the performance of Irish pension fund managers in 2001 and you won't feel so bad. The average fund in the Irish market fell by 5.6 per cent.

Mr Paul McGowan of Dolmen Butler Briscoe believes that private clients can be as informed and involved as they want to be.

"You should constantly review and monitor your investments, and be prepared to make changes at the right time.

"The classic mistake made by inexperienced investors is to cut profits and run losses."

It is accepted that direct equity investment is not suitable for everyone.

However, you can tap into some of the growth in equities, while making fewer decisions and taking less risk, through collective investments (managed funds) or guaranteed products.

A good financial adviser will establish what level of risk/return you are comfortable with and then make recommendations.

For those that do favour equities, the question is where to invest? Irish investors tend to favour the Irish market because they are familiar with it.

Davy's private clients hold about 35 per cent of their portfolios in Irish-quoted companies, 20 per cent in the euro zone (mainly through collective investment products), 25 to 30 per cent in US equities and 10 per cent in the British market.

One of the basic principles of equity investment is to spread the risk across different sectors, companies and geographical areas with a balanced portfolio.

To set up a balanced portfolio from scratch, Mr McKiernan suggests that an investor would need a minimum of €60,000 (£47,220).

"That's not to say you can't start with smaller building blocks of €2,000 or €3,000 in good solid companies."

Most Irish investors start small. Research published by the Irish Stock Exchange (ISE) last year found the average number of companies in which investors held shares was 1.9.

Excluding Eircom shareholders, 42 per cent of those who owned shares quoted on the ISE held stock in just one company. A further 21 per cent were invested in two companies and only 3 per cent held stock in five or more companies. Clearly, share ownership in the Republic is still in its infancy.

Mr Martin Kane of Goodbody Stockbrokers says it has to be acknowledged that the Irish economy is minute is world terms. "Investors are recognising the merits of having a portfolio that is diversified both geographically and sectorally."

Costs are incurred every time you buy or sell shares. Stamp duty of 1 per cent is payable on the purchase of Irish shares. Purchases of British equities attract stamp duty as well, while US shares do not.

Stockbroking commissions are structured on a tiered basis. The standard charge for buying or selling is 1.65 per cent of the transaction up to €19,050 (£15,000). The rate drops to 1 per cent between €19,050 and €38,090 and 0.5 per cent for trades of more than that amount.

Rates vary slightly from firm to firm and are lower for execution-only online trading.

Capital gains tax (CGT) of 20 per cent is payable on gains from sales of stockholdings. Each individual has an annual allowance of €1,270 they can earn before paying CGT.

When you do get into share trading you have a choice as to the form in which those shares are held. For processing reasons, there is a move towards electronic accounts and away from share certificates. The US market has been operating on a paper-less basis for many years and most of the world's markets are in the process of moving to a fully electronic environment.

Shares that are held in electronic form can be traded, on instruction, at the touch of a button. In contrast, time delays involved in posting share certificates back and forth can mean an investor missing out on the price they wish to sell at.

The important thing, according to Mr Kane, is to have confidence in the reputation and financial strength of your broker.