Tip #1: Focus on quality stocks, not markets
Buying a tracker fund or a unit trust that’s benchmarked to an index is probably not the best strategy. Contrary to popular belief, tracking an index doesn’t reduce risk, as large portions of indices can be concentrated in specific firms or sectors.
A concentrated portfolio of ten to 12 good-quality firms across different industries can yield superior returns while diversifying risks to acceptable levels.
In our Stock of the Month
portfolio, we’ve invested in stocks from different sectors to spread the risks. What’s also great is this portfolio proves that you can make more money investing in a good selection of individual stocks than tracking an index.
Tip #2: Develop your valuation skills
This is the linchpin of successful investing in volatile markets.
What’s important is that you remain disciplined, choose a valuation metric you’re comfortable with and stick to it.
For example, you may decide to value shares on the basis of their PE ratios and note that a particular company trades in a range between 11 and 15. Providing this company meets the quality criteria, you’d attempt to buy it when its PE is 11 and sell at 15.
Tip #3: Don’t be afraid to hold cash
Unlike many professional investors you don’t have to be fully invested in shares. If you don’t see any shares that look good value, you don’t have to own any.
Holding cash gives you the opportunity to exploit attractive valuations when the time is right. This is far better than seeing a fully-invested portfolio lose value in a bear market.
Remember, even the best businesses are terrible investments if you pay way too much for them. That’s why you want to seize on an opportunity
to buy a fast-growing company that’s trading at cheap levels.
You’re more likely to make more profits buying a company at a discount. How much cash should you hold? It all depends on the size of your portfolio, but look to hold around 10% of cash.
Tip #4: Build a watch list with your favourite stock picks
Most of your time shouldn’t be spent trading or investing, but researching quality shares, so you can be in a position to buy them when the valuation is right. Remember: A good firm is only a good share if bought at the right price.
That’s why I like to keep a watchlist of stocks I’m interested in or look very attractive. It doesn’t mean I buy them right away. But I rather keep a close on eye on them just in case their prices fall to attractive levels.
Knowledge brings you wealth,
Managing Editor, FSPInvest.co.za
For inside info on what stocks I have my eye on this month, be sure to see what's going on
in our monthly newsletter, Stock of the Month
. Here I do all the heavy lifting for you and you can simply invest in the most promising stock the JSE has to offer for the month, it's really that simple...