Ken Taylor: No wonder investors are running scared after Irish bailout

Now, after its government has negotiated billions in emergency funds, the ratings agencies will assess Ireland's financial strength as being on a par with Trinidad and Tobago. Such is the reality of the debt mountain attaching to the peripheral European nations. Attention has swung towards Portugal, Spain and Belgium having previously focused on Greece, and there is a growing belief that such dramatic events will continue until they reach the streets of Paris.

It must come as a blow to UK taxpayers that no sooner have we been told to brace ourselves for austerity cuts than our government pledges a good slice of our savings to help out our Irish neighbours. According to the Chancellor, it is in our interests to help a friend in need. When you realise the Irish banks owe our banks nearly 140 billion, that might qualify as the understatement of the year.

Ireland is the second European country needing a bailout within seven months - and it is unlikely to be the last. We are experiencing extremes of behaviour, all of which are bewildering for investors.

As soon as Greece was presented with a rescue package, the risk appetite among investors returned. Then Ireland's problems served to put everything in reverse. How can one make an investment decision with confidence when such uncertainty prevails? Would the bailout of Ireland have been such a shock if you had been aware that its major bank suffered an estimated outflow of deposits of 10 billion between late August and early September? Or that the promise of the Irish government to guarantee deposits of any level was completely unfounded as it was in no position to do so?

These facts all combine to emphasise the fragility of any recovery, and also give an idea of why so many investors are running scared of stock markets.

It has been observed by many that the doom and gloom is overdone, and that opportunities lie in wait for those with the commitment to invest in equity markets. Some believe the US consumer, who has been deleveraging for two years, will start spending way beyond expectations in the coming months.

This may be true. After all, with deposit rates at near zero and bond yields similarly low, why not invest in equities? On a historical basis, many shares are undervalued. Further, there are great companies generating solid, growing profits that provide solid dividend payments for shareholders. Such dividends alone are often in excess of the yield payable on (theoretically at least) more secure gilts.

A recent piece of research suggested the major insurance companies have very little exposure to equities outwith their insured interests.If this is true, then it must be concluded that equities are massively under-owned. This either provides a huge pointer as to the opportunity open to investors, or serves as further evidence that equities are being shunned because risk is not perceived as being rewarded.

Relating all of this back to the context of individual investors I would conclude that more than ever a diversified approach to portfolios is mandatory. It is not all about the best returns, but rather how to achieve consistent growth without exposing your capital to unreasonable risk.

We probably now exist in a prolonged period of what might be described as sideways markets, and hence yields and dividends assume far greater significance. The traditional buy-and-hold approach will become less appropriate, and more discipline in terms of when to buy and sell and at what price will become more important. Such dynamics present a real challenge for investors, as they represent for many a change in habits. However, the potential rewards will be well worth achieving.

• Ken Taylor is director of Mackenzie Taylor Wealth Management.