High drama on the stock markets

Just when you thought it was safe to go back into the stock market everything seems to have gone mad again. The day to day market fluctuations, by which ever way you choose to measure them, are bigger now than I have ever seen in my working life – hugely up one day and massively down the next.

But it is this kind of roller coaster ride that not unnaturally unnerves all but the bravest of Donegal investors. But the Irish market has fared quite well. Although it has fallen by two per cent this year markets in Continental Europe have seen falls of 12%. Mind you, the Irish market did lose a quarter of its value last year.

The credit crisis which started in America and quickly worked its way across the Atlantic was not helped by the shock horror that a rouge trader at Societe Generale had managed to run up trading losses of 5 billion Euro. In this day and age I find it surprising that this can actually go undetected – certainly if I overspent by 5 billion I think my local bank manager might spot it! But let's put this into context.

Although this loss is the equivalent of five Nick Leesons put together Societe Generale is a massive company and they quickly announced a repair plan and the company share price fell by just 5 per cent. The actual losses amount to less than one year's profit.

Current market volatility is clearly disconcerting for private investors but for investment managers it throws up a host of long term opportunities. Many of them feel that the downgraded share prices make valuations nothing other than cheap and they see this as an excellent opportunity to buy into quality companies at knock down prices. It is a January sale like they have not seen for a long time. Certainly if you are in growth stocks at the leading edge of technology or development then you can get things wrong.

But if you are investing in companies that have a product that sells every day at a profit and then if this profit is paid out to shareholders in the form of dividend then it seems hard to go wrong.

Banks, insurance companies, retailers (especially food retailers), breweries and tobacco companies sell such products every day of the week. A cash profit is put in their bank in short order. And a number of funds in Ireland specialise in this approach, prominent among them being New Ireland's Distribution Fund and Hibernian's High Yield fund.

Because many of these funds are the preferred choice of retired people risk is kept low by not letting any one company dominate and always maintaining a good wide spread of risk. Companies paying high dividends are by their nature less risky because they tend to be well diversified and in fact the Hibernian High Yield fund grew by more than 5 per cent in 2007 compared with a loss in the Irish market of five times that figure – of course, the fund is not just based in Ireland; it is spread around the world.

And with the resources that these companies have behind them you would have to think yourself pretty clever to buy shares directly in the hope of beating the experts at their own game.