It has been another busy week of questions from social media. With concerns about another lockdown, I’ve spoken to several people concerned about their stock investments and retirement plans. I’ve put together some top tips from my years of expertise:
Worry About the Downside
You want stocks which will fall less, and recover faster when markets fall. We do not know what will cause stock falls, but we know they will happen. So we want protection. Take what is probably the safest company in the world – Microsoft – it still fell in March during Covid, but recovered faster. All companies rise when the whole market is, but we need more companies with a high average return, and narrow range of negative returns.
Do Not Have a Portfolio of 40+ companies
I have quite a few people I know who’ve built up owning every stock in small sums. This is not only inefficient, unmanageable and leading to paralysis in investing, but also it does not give diversification because that happens at around 15 stocks (Gates has 23 stocks, and most of his money is in 10 stocks – the same is true of most billionaires).
Take 12 months and Review
Any stock you own should be held for 12 months then reviewed. If you hold too long or too short you are not going to benefit from its performance. If it drops 30% in that time from its peak, then sell. Research from Goldman Sachs Asset Management emphasis the 12 month period. When a stock doubles, take out your original capital and review the company in 12 months.
Do Not Add to Losers
Never add to a losing position, unless you are ‘pound or dollar cost averaging’ ie you planned all along to buy in instalments to get a better average price, or its Apple, Amazon, Microsoft, Alphabet, Facebook.
Pick Stocks from Around the World
I always meet people saying ‘India, Japan’ – no. You want global stocks because they perform. The country does not matter, as long as they perform. And measuring performance means knowing the free tools which will tell you the cash flow a company produces, it’s ability to outperform the market (Alpha) and it’s consistency of returns (Sortino).
Sadly most people do not know these simple truths used by the biggest wealthiest individuals and funds.
Do Not Chase Yield Alone
Many people look at dividend yields and think that allows them to draw down an income. Actually, in this low interest environment many companies have dropped dividends and their share prices have dropped, so you have a loss. You may get say 5% dividend, but a capital drop of 50%! Better to get a stock going up 50% and taking out 5% of your capital as profit isn’t it?
A small change makes a big difference
Even a one percentage gain per annum in your portfolio can make a huge difference. Focus on the narrow group of companies that will be the best, rather than buying everything you read about to try hedge your bets.
Bonds – Equities – Funds
As you approach retirement, you want more certainty. A bank account does that, but no gains. Bonds are meant to give you certainty and a slightly more return. ‘Bond-like’ returns can come from a portfolio of stocks, where they are narrow in their range of moves. Now in stocks, that could mean down still 15-20%, but the upside skew gives you the compensation.
Funds for the Confused?
Whilst some prefer funds, remember most funds get their returns from their top 10 holdings by size, and those you could have bought yourself. Do not just buy a fund because it says ‘global’ or ‘growth’ or ‘Emerging Market’. Their poor labelling is matched by their poor performance due to their high fees.
Read my book (free) Investing Unplugged. It’s an international bestseller, published by Palgrave Macmillan. I teach you more about what you need to do. It’s free at www.investing-champions.com
Alpesh Patel
