We’ve always thought that discipline may help you choose the best investments and increase your returns. Here are six things to remember when you buy stocks.
We’ve often stressed the point that above-average long-term investment returns are linked to sound portfolio management. That’s partly because adhering to a long-term plan helps you to avoid the pitfalls of bad investment habits. Here are six bad habits and how you may avoid them.
■ Impulse buying. It’s easy to let yourself be tempted to chase after a fast rising stock, or to buy on a hot tip from an advisor—or hairdresser. This may be fine from time to time, as long as such purchases don’t make up a major percentage of your portfolio.
For the most part, however, you’ll do better to make a buying plan with clear portfolio objectives. When you buy stocks, make sure your choices match your objectives. That way, you’ll be less tempted to buy on impulse and you’ll have a better chance of achieving your long-term investment goals.
■ Over-diversification. When investing in the stock market, you should diversify to reduce risk, not to compensate for a lack of confidence. Our advice is to have a balanced portfolio spread among the six investment sectors. This helps reduce market, industry and business risk.
For the best results, start with specific goals. You may decide, for instance, that you want 25 per cent of your portfolio in banking and finance stocks, 20 per cent each in utilities and multi-sector stocks, 15 per cent in consumer stocks and 10 per cent each in manufacturing stocks and resource stocks. Then make sure that each single investment is worth about five per cent, but no more than 10 per cent, of your portfolio.
■ Over-trading. It’s always easy for novice investors to panic when their stock falls in price. This reaction causes them to sell without giving the stock a chance to perform. If you fall into this category, remember that the more trading you do, the more commissions you’ll pay. Your returns, therefore, will have to be higher to make up for such over-trading.
Prudent investors ignore near-term fluctuations. They try to give each of their investments time to live up to expectations. Peter Lynch, former portfolio manager of the Fidelity Magellan Fund and author of One Up On Wall Street, usually held his stocks for about three years to give them time to perform.
■ Procrastination. When you don’t review your portfolio on a timely basis, you run the risk of holding stocks that should be sold or your portfolio may become unbalanced among the six main investment sectors.
A portfolio review on a six-month or annual basis lets you tidy up your holdings. Remember, a company’s fortunes may turn bad at any time and you should be prepared to sell a stock if its fundamentals have significantly deteriorated. If a stock no longer offers good long-term prospects, switch to a more promising alternative.
■ Don’t over-speculate. Some investors like to buy concept stocks at very low prices in the hope that they will rocket skyward. There’s certainly nothing wrong with this strategy as long as you can stomach the risk. To maintain your original capital investment, however, you should still hold at least an equal portion of good-quality stocks such as those we rate ‘Conservative’ or ‘Very Conservative’.
■ Ignorance may be harmful. Before you buy a stock, know the company. Be aware of its financial condition by reading the annual report before you make an investment. The more prepared you are to understand the company, the less likely you’ll base your investment decisions on emotion. The result should be better investment returns.
This is an edited version of an article that was originally published for subscribers in the March 23, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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