It's all yours, a big risk

Windfalls: Still wondering whether to sell or hang on? Rachel Fixsen has some suggestions

Investment wisdom has it that there is no point in owning shares unless you have enough money to hold a wide variety. Some say this the only way you can spread your risk broadly enough to make equities a sensible investment rather than an out-and-out gamble. If this is the case, what makes Halifax shares, or those from any other demutualisation, so different?

Privatisations and, more recently, building society demutualisations, have encouraged people who normally stick to the safety of deposit accounts to throw caution to the wind and put their assets at the mercy of the stock market.

Yet the risk of holding shares in only one company can be enormous, says Tim Cockerill, investment director at Whitechurch Securities, a firm of independent financial advisers in Bristol. "You only need a profit warning for the share price to get hammered very badly, and you've lost, say, 15-20 per cent.

"The general feeling that you need a large portfolio to be well diversified is pretty well-founded," Mr Cockerill stresses.

It is often reckoned that you need a minimum of 11 holdings for a reasonable spread of risk. But the government drive to widen share ownership through waves of privatisations of state-owned enterprises in the 1980s, and subsequent building society demutualisations has created many new share-owners who have little or no diversification to shelter them - only 8 per cent held shares in more than one company, according to a 1996 survey.

ProShare, an independent body that promotes share-ownership, says 16 to 17 million people are expected to be in the club at the end of this year, against 4 million in 1983.

Buying units in an investment fund, such as a unit trust or investment trust, is one way to own equities on a smaller scale with a broad spread of risk. So if they are the only shares you possess, should you sell your windfall shares in and invest the money in another type of vehicle?

Not necessarily. Another school of investment thought advocates keeping no more than a minimal variety of stock. The reasoning goes, according to Bill McNamara of stockbrokers Durlacher, that if you hold 10 different shares the one you have the best hopes for is likely to be far better than the one you give the worst rating, so you should therefore stick to two or three of the best bets.

But if you are going to follow that strategy, the choice of stocks you include in your few is critical. "If you are going to hold one stock in a sector, you have to ascertain it's the best," Mr McNamara says. And Halifax is not, he says. "It is too narrowly based ... totally dependent on the UK mortgage market."

Whether it is wise to hold shares in just one enterprise, privatisation and demutualisation stocks are an exception. "They were sold off cheaply and the businesses have subsequently been run well, so people have done very well out of them," says Mr Cockerill.

The cheap launch price of demutualisation shares puts them on a springboard and gives them good chances of growth initially. Once in the market, the new Halifax and Alliance & Leicester shares enjoy strong demand from institutional investors, such as investment funds, which have obligations to own all shares which are part of the FTSE 100 index.

So far, Halifax shares have risen to around pounds 7.73 from the initial auction price of pounds 7.32, and Alliance & Leicester shares are trading at pounds 5.99, up from their auction price of pounds 5.33. But this does not mean above-average growth prospects will last. Unless you plan to keep Alliance & Leicester or Halifax shares long-term, just when should you sell?

Mr McNamara says this depends on your view of the stock market as a whole. "Banking shares in particular ... tend to follow the FTSE quite closely."

One analyst adds: "Most brokers would tend to be cautious about A&L stock, which may well be heading for weakness, having been artificially buoyed by strong initial demand from institutional investors."

Many people end up with holdings of single-company shares as a result of share saving schemes at work. The discount, often 20-30 per cent, offered on the purchase price of their company's shares means employees usually do very well out of such schemes.

But in many cases, you should soon sell the shares you get, take the money and run. Mr Cockerill says you need professional advice on whether to hold on to such equity stakes long-term.

Even if a couple of privatisation or demutualisation stock holdings are not enough to constitute a well-balanced equities portfolio, they could well be the start of one.

Such a fledgling portfolio is often best wrapped as a general self-select PEP, where windfalls, subsequent individual stock purchases and unit trust holdings can be held tax-free up to the limit of your allowance, Mr Cockerill says.

"It's down to personal choice and appreciating that in the early days the risk is higher."