There is no doubt that utilising stocks as a key part of your investment portfolio can reap long-term rewards. However, for most people the benefits of this asset class seems so elusive. A big reason is that people forget that they are to be investors and not speculators. Unless you are clairvoyant, you like the rest of us can’t predict the future. But what you can do is base your decisions on a strategies that take into account real facts and analysis rather than risky, speculative forecasts. Here are a few equity strategies that you should adopt right now:
Allocate funds for investment according to your age and risk tolerance.
At age 30, I am comfortable with risk, therefore an asset allocation of 90-100 percent of stocks is good for me. History also helps to give me comfort knowing that equity is the kind of asset that has produced the best returns over the longest period of time. If an all-equity portfolio is not for you; use bonds to reduce equity risk in your portfolio. A strategy of increasing your bond allocation as you age is also a good way to reduce the risk of a sudden, massive drop in your portfolio value. Use our Barita Road Map to find out your risk profile and the best allocation to meet your goals.
Invest in quality businesses at the right price
“Whether socks or stocks, I like buying quality merchandise when it is marked down.”- Warren Buffet
If you approach equity investing with the mindset that you aren’t just buying stocks, but you are buying businesses, you will be ahead of the game. And if the market is willing to sell those businesses for less than they were really worth, that’s your time to buy. I like stocks of businesses with strong pricing power at historically low price/earnings and price-to-book value multiples.
Growth stocks for the long run
Thomas Rowe Price Jr. was once quoted saying “[Most big fortunes result] from investing in a growing business and staying with it through thick and thin.” I tend to look out for stocks with earnings and dividends rising faster than inflation and economic growth. The strategy of buying well-managed companies that have a return on equity that is beating at least 10 year inflation (approx. 10%), with a strong cash flow that allows them to pay a solid dividend is a good long-term strategy.
Make savings automatic
Automate your contributions and stop over-thinking stocks. Timing the market is difficult, which makes financial advice very necessary. Your action can be simple; invest on advice, but save always so that you can have cash ready to take advantage of opportunities. The reality is most persons aren’t investing enough for retirement and most investors have no clue how much they should be investing to secure a comfortable future. The online calculator at basic.esplanner.com can help you to start crunching those numbers.
Discipline beats emotion
Emotions are a natural part of the human experience, but frankly it will be of little use to you in the world of investing. Giving in to fear, greed, excitement and trying to ‘beat’ the market tends to lead to investors either exiting a good trade too early or letting losing investments run out of control. If you become disciplined and focus on executing your set plans and rules of action you will win.
As always, please engage an investment advisor who can help you create the right portfolio based on your risk tolerance.