Back the bears or bulls, but greedy pigs get slaughtered in the market

Waiting in the queue for the roller-caster you can't help but read the warning signs: "Not advisable for those with heart conditions", "The management suggests that those with weak stomachs do not take this ride", or "The fainthearted should avoid this amusement at all costs".

Those lured by the stock market roller-coaster often ignore the signs and buy their ticket with money they cannot afford to lose then get on the ride without any preparation for what may come.

Some stock market participants experience a smooth trip but others come out sick, broke and exhausted from the unexpected ups and downs.

Investing in the stock market is not something to be done lightly or without preparation. First-time investors may think stocks, or equities, offer the ultimate get-rich-quick scheme but this strategy often leads to heartache.

In the current low-interest rate environment, investors are naturally looking to the return on equities compared with other investments. Historically, comparisons of asset classes like equities, property, bonds and cash show that over the long term, equities are the best performers.

But "long term" is the most important aspect of that sentence. By its very nature, the stock market is a volatile area that falls and rises unpredictably based on corporate decisions, world economies, international crises and obscure economic indicators. Remember, even professionals cannot predict the path of a tornado. You must have the stomach, nerve and time to ride out the highs and lows of your investments.

For example, Iona Technologies, one of the great recent Irish success stories, suffered heartbreaking losses for investors on April Fool's Day. It was no joke as owners of Iona stock watched the price of a share go from $30.38 (#28.19) to $14.81 (#13.70), a fall of more than 50 per cent in just a few hours.

Imagine if you had made the unwise decision of placing your hard earned lump sum in this one stock. You purchased a certain number of Iona shares valued at around £5,000 because everything you read about the company was positive. On March 31st, the shares were worth around £5,000 and then suddenly on April 1st they plunged in value to less than £2,500.

What would you do? If you sell the shares, you've lost £2,500 and have no chance of making it back. However, the £2,500 is safe as cash.

If you hold the shares and do nothing, the stock price may fall further or it may inch its way higher. There is no way to predict what will happen next. However, there is a possibility that it may take months or even years for the stock to bounce back to the £5,000 mark. Time gives investors the luxury of riding out these dips.

Potential investors may think the stock market is glamorous and pensions or life assurance are dull. Unfortunately, this mindset is shaping the way many people think about their personal investment strategy. This is a dangerous and potentially expensive attitude.

Planning your personal finances takes time, research and effort. It is essential that you create safety for your future before taking on the aggressions of the stock market. Safety may include a pension, life assurance or both. Although stocks can be a valuable part of any investment strategy, they should be approached with a great deal of caution.

Wall Street brokers and traders often talk of "bull" or "bear" markets, but the most feared animal in investment circles is the pig. In a bull market, investors are happy as they watch most stock prices move in an upward direction. The bear market starts when prices slow or move downward for a significant length of time. Some professionals bet on the bull, others the bear but if they follow the pig they always get slaughtered. In other words, greed is not a wise motivation for stock market investing.

One basic consideration is the length of time for which you are willing to put money away. Despite the recent hype, the stock market should be viewed as a medium to long-term investment. Few people make money on short-term investments as it is always difficult for beginners to know when to get out or when to get back in.

The minimum length of time for stock investments should be between three and five years and range upwards to 10, 20 or beyond.

The next question is: how much risk are you willing to take? Often, the riskiest investments give the greatest rewards, but they also have the potential for massive losses. Younger investors usually have more tolerance, and time, for high-risk investments.

Moderate risk investments may not reach the heights, but their valley's are not as deep as high-risk stocks. This moderate profile allows for some risktaking buffered with safer investments to offset losses.

"Blue-chip" stocks, like AIB and Bank of Ireland, are considered the lowest risk as they have demonstrated steady returns over time. Most stockbrokers recommend that their private clients include some of these old reliables in their portfolios.

Access to your money is another element to consider. Do you need income on a regular basis or are your willing to have all the growth, or profit, reinvested back into the stock? Some pooled investments offer both growth and income.

Investors have two options when they are ready to purchase stocks; they may invest directly in the market or in a pool of investments such as unit trusts (mutual funds) or with-profit products offered by insurance companies.

Pooled investments have several advantages over direct purchases. These investment products combine funds from many investors which enables the company to employ a professional investment manager to establish a diversified portfolio of investments. Investors purchase units or shares in the fund and their value rises or falls based on the combined performance of the underlying assets.

A basic investment portfolio may be divided across asset classes - stocks, bonds, cash and property - but stocks may also be spread out across industries like banking, technology, pharmaceuticals, chemicals, building materials, media and life assurance. This means fluctuations in one industry will not dramatically affect the fund price.

Picking individual stocks usually suits those with extensive experience of the market.

So, what is a virgin investor to do if he or she does not want to buy into a fund? Stock-buying decisions should be based on lengthy research into the stock including examination of the company itself, the outlook for the industry and numerous economic indicators.

The average investor will find it difficult to make an informed decision. This is where an investment adviser comes in. They are trained to look at the fundamentals of a company as well as the potential for long and short-term growth. The larger investment firms may have a staff of researchers examining each industry and issuing recommendations to brokers to buy, sell or hold certain stocks. This may be a short, medium or long-term recommendation.

Talk frankly with your adviser as to your needs, and possible needs, over time. Also make sure they are offering you independent, personalised advise rather than just selling you the latest products.

If you are thinking about investing in the stock market:

First, put your finances in order: make sure you have a pension and life assurance. Reduce or cancel all existing debt;

Ask yourself if you can afford to lose this money. Investing in the stock market is a gamble even with proper preparation;

Seek professional advice from an authorised investment firm with fee-based independent advisers. Never, do business or provide information to anyone who "cold-calls" you on the phone. The Central Bank recently issued a warning to investors about unscrupulous foreign companies doing business in the Republic. For a list of authorised domestic and foreign investment companies, call the Central Bank at 1890 200469;

Answer basic questions on: length of investment, acceptable risk levels, access to funds, direct or pooled investment;

Diversify your investments: it is not advisable to buy just one stock. For safety, an investment portfolio should also include some cash, bonds or property.