Face-to-face with the harsh reality of playing the market

Jonathan Gornall meets a couple who have suffered from bad investment advice.

Playing at playing the stockmarket is little more than an educational laugh; it's a fun way of demonstrating that, in times of economic uncertainty, chance plays as large a part as wisdom when it comes to managing personal finances. I can "win" or "lose" thousands of pounds but no-one gets hurt in the process and I still get to sleep soundly at night. This week, however, I was reminded that in the real world global financial uncertainty is hurting real people and keeping them up at night.

The other day I found myself chattering inanely to a woman for whom the whole premise of this column was far from amusing. Like me, "Sally" and her husband know very little about the stock market. Also like me, they are now "playing" it, but far from doing so for fun they are trading as though their life savings depend on it. It was just over a year ago that one of them received one of those telephone calls, the product of a regulatory system that frowns on cold-calling but in the process encourages the altogether creepier business of clammy-calling - marketing by "recommendation".

Companies persist with this tactic for the same reason that some guys flirt with dozens of women: sooner or later, someone says yes to a date. Sally and her husband are intelligent, hard-working streetwise professionals. They would not fall for your average Ponzi scheme. What they are, however, is hostage to their small fortune of £100,000 (Dh564,854), the sum total of the savings they each brought to the relationship plus the cash they've stashed away in the UAE - and, in a time of financial uncertainty, it was a reliance that rendered them less than confident and vulnerable.

"Financially, we are both very risk-averse," Sally told me. "I paid off my student debt within a year of graduating; we always pay off our credit card each month." Their financial objective is clear: "We want to settle back home and raise a family and the smaller our mortgage is the better. That was the whole point of coming here. We were happy to have our money in a simple bank account, earning 2 or 3 per cent interest."

They would certainly be happy if that was the case now. Instead, they agreed to meet a couple of salesmen from the company who skillfully picked apart their certainty that they were doing the right thing with their money. "They seemed caring and reasonable and were very persuasive. They made us feel like stupid people who were keeping their money under the mattress and said our money should be working for us."

All this, of course, while the financial world was being rocked to its very foundations. Those sales guys should get an award (though probably not any kind of medal of honour). Their money - minus, of course, the up-front, win or lose percentage the company sliced right off the top - would be invested safely, the risk spread over many companies, sectors and even countries. They could expect average annual growth of between 7 and 14 per cent.

Quite possibly, that was true, but the key word there is "average". The average gain on the Standard and Poor's 500 between 1995 and 1999, for example, was a pulse-quickening 25 per cent, but if you had piled in 2000 you would have suffered three continuous years of losses and seen every dollar shrivel to 58 cents. The stock market, in other words, is no place for dreams or nest eggs. They were advised not to follow the progress of their portfolio too closely. Luckily, they ignored the advice - and panic set in: "Everything was going down. My husband was on the website every day. Every time we looked we'd lost something else."

In fact, within just a few months they lost £8,000. The one redeeming feature of the package they had been sold was that there was an over-ride facility: they could intervene and buy and sell on their own account and this is exactly what they did. "We felt like we'd been taken for a ride," said Sally. "The thought of writing off all that money made me feel physically sick. We decided to monitor it every day and sell every time something went up."

In short, they became reluctant day traders - and, despite stock-market experience and insight on a par with mine, by sticking to their simple but effective strategy they immediately began to have some success. Since May they have clawed back £4,000. "I am determined we will at least break even," said Sally. "We might even make two or three thousand profit." Like they would have had they left the money in the bank.

But that will be the end of their trading career. "We got our fingers burnt. From now on the money is staying in the bank; we'll count ourselves lucky to have 2 or 3 per cent interest and no sleepless nights." And so back, insensitively, to the fun world of make-believe investment. My technique is the opposite to Sally's. Every time a stock flickers downwards, I sell it, and put the money into the one that's doing best.

This week it was the turn of the Man Group to take a hike. I had bought 934 shares at 211.4p each on July 20. Down to 206.9p per share, this week I bailed out for a total of £1,924.95, shaving £73.93 off my original investment of £1,998.88. I used the money to buy another 1,500 shares in Old Mutual, which continues to go from strength to strength. This is the fourth time I've bought into this stock, which since July 20 has risen steadily from 111.4p per share to 126.3p.

The rest of the portfolio is looking good - blue ticks across the board - but what that snapshot disguises is that, since my initial investments on June 13, although my portfolio overall has swung wildly from £600 profit to £400 loss, right now the pendulum is more or less back in the middle. In short, I am currently a mere £37.96 better off now than I was when it all began on June 13. What I lack, of course, is motivation. Maybe I should get Sally to make my moves.

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