10 lessons to be learnt

05:55 AM Dec 31, 2009

It has been a decade that many investors would rather forget. On Dec 31, 1999 the FTSE100 closed at 6,930 and 10 years on it still has some distance to go before it regains this peak, sitting at around just 5,300 last week. The Daily Telegraph's Emma Simon looks at the lessons to be learned from the decade that shocked the stock market.

1. A guarantee is only as good as the guarantor

Structured products may have been guaranteed by Wall Street investment banks. But once Lehman's went bust, people realised that many of their guaranteed investments were not as guaranteed as they thought.

2. Don't buy something you don't understand

Financial advisers often point out that many people drive a car without fully understanding how the engine works. But those who got lost money in split-capital trusts and precipice bonds will no doubt now think twice before being reassured by such twaddle. If a car breaks down there is always the AA - there isn't any equivalent rescue service when it's your life savings.

3. Higher returns come with higher risks

If you want to better returns than a building society account, you need to take more risk with your money. This almost always means you could also lose capital.

4. Don't pay more than you have to

The advent of the Internet and price comparison sites mean people can now shop around for financial deals and compare prices and products more effectively.

5. Long-term investments do not always mean long-term gains

Just because an investment should be held for a minimum of five years, does not mean you will get a positive return at the end of this period, as the "lost decade" for equities demonstrates.

6. Ask how your adviser earns his money

Commission skews judgments; it pays to inquire why comparable products are not being recommended.

7. Read the small print

What will you be charged if you exceed your overdraft limit? What penalties will be applied if you cash the investment in early? When can the insurer turn down your claim? Such vital information is almost always in the small print.

8. Don't rely on easy credit

Many assumed cheap loans, remortgages and interest-free credit cards would bail them out of any financial difficulty. But these credit lines disappear when times get tough.

9. Don't rely on others to provide a pension

If you want a decent retirement, start saving. Employers have watered down pension schemes while the value of the state pension has declined. Even generous public sector pension look under threat.

10. What goes up also comes down

Shares prices can plummet, house price can fall, and interest rates can tumble as well as rise sharply too. It's best to plan for such eventualities. They almost always happen.