The stock market is about to end another tough year, its second on the trot. The FTSE 100 index will finish about 15% down on the year. Most portfolios, whether they be those of fund managers or individual investors, will have had a poor year. Some will have fallen even further than many individuals would care to publicly admit, and by 'publicly', I mean to their partner.
A conversation could easily go along the lines of the following.
Mrs D: "I hear the stock market has fallen this year. How has your portfolio performed, dear?"
Mr D: (Whose portfolio has fallen by 25% in 2001) "Well, it has tracked a little downwards too, but that is to be expected. But my portfolio has recovered quite a bit since mid September (it was down 45% at one stage) and I expect it will keep doing so in the new year."
Mrs D: "Phew. Doesn't sound as bad as the press has been making out. I feel a bit bad about telling you that your money is safer under the bed. As you've always told me, the stock market is the best place for your money. Well done dear."
Mr D: (Thinking to himself "Geez. The portfolio better bloody well go up next year or else I'm a goner and the kids will be eating baked beans for breakfast lunch and dinner, as well as potentially looking for a new wife!") "Thanks love. What's for dinner tonight? I've lost a little of my appetite."
So, what is Mr D going to do about the situation? Here are 8 top tips.
- Get yourself a strategy. 'Buying cheap shares' is not a strategy. See below.
- Don't buy expensive companies. Over the years, extensive research has shown that buying companies with low price to earnings ratios (P/E), low price to sales ratios (PSR) and low price to book ratios (PTB) has been the most successful long-term strategy.
- There are no guarantees in investing. Just because the stock market has fallen 2 years in a row, it doesn't mean it's necessarily going to rise in 2002.
- Don't speculate. Investing is a business, not a hobby.
- Don't try and trade your way out of trouble. Attempting to recover some of 2001 losses in the first months of 2002 is a strategy that will almost certainly fail. It's akin to putting your biggest bet of the day on the last horse race, attempting to recover all previous losses of the day. It rarely works!
- Switch to an online stockbroker. You'll be amazed at the difference!
- Be prepared to admit defeat. If you can't beat the stock market by picking shares, stick to an index tracking fund. It's cheap, easy, and will ultimately give you better long term results.
And finally...
- Don't lie to your partner. You are only kidding yourself, and also we'd hate to see the divorce rate rise even further.
We'll close with an anonymous poll (you'll first need to register, but that's very quick and easy).
How did your portfolio perform in 2001?
a) Up
b) Down
c) Unchanged
d) Don't know
Click here to vote.
From all at the Motley Fool we wish you a very Merry Christmas and a prosperous (especially in portfolio terms) 2002.
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