If you’re looking for a New Year’s resolution to make 2020 a great year for you and your family, you could hardly do better than getting your investing plans sorted out. Here are three of the best resolutions for 2020.
Resolution 1: I will do my due diligence
Too many investors lose money because they don’t do enough research.
You wouldn’t buy a car without going to see it first, looking under the bonnet to see the state of the engine, checking its fuel consumption against its rivals, or even asking whether the price you’ll pay is in line with its true market value.
And yet some investors will buy shares sight unseen. Some will buy shares based on tip-offs from anonymous rampers on bulletin boards, without checking whether a business is making profits, how much debt it has, what the company’s plans for expansion are or any of the other useful markers that can give you a reasonable expectation that the share price or dividends will increase.
Some will even make their next buying decision based solely on a flashy double-digit dividend or a cheap-looking price-to-earnings ratio.
Resolution 2: I will make a plan and stick to it
The real portfolio killers are the decisions you take on a whim. Randomly buying shares in a gold or silver miner you’ve never heard of because some bloke on Facebook shows you a chart that the share price is up 20% in a week just won’t do. Sadly, it’s all too common.
The key to getting the benefits you desire is to take a little time to figure out exactly what you want in the first place. From this structure, you can see clearly how you are going to invest.
Grab a pen and paper (yes, I am advocating writing it out longhand as it’s too easy to get distracted if you use your phone) and answer these questions.
Am I going to be a value investor? That is, will I buy solid FTSE 100 companies that I believe in long term, but whose share price happens to be depressed in the short term, so I can pick up the shares relatively cheaply?
Am I looking to buy FTSE 100 companies with strong dividends that I can use to help fund my living expenses (now or in the future)? Or am I mainly looking for growth? Am I a buy-and-hold investor, or do I want a quicker turnover in my portfolio?
Do I want to buy FTSE 250 or AIM-listed companies, those whose dividends may be relatively small and may only pay enough to cover my trading costs, but whose share price might double over the next five years?
Resolution 3: I will admit I’m not always right
The ‘sunk cost fallacy’ is a major problem for many of us. Once you’ve researched a share, dug into its financials, seen its future potential and competitive advantage, and pulled the trigger, you become irrevocably emotionally attached to it.
I know this to my detriment. I loved the Sirius Minerals story, so why didn’t the market agree with me? I carried on averaging down month after month, throwing good money after bad, until my investment was worth next to nothing. Don’t be like me. Admit when you’ve got it wrong, get out and use your hard-earned cash for a better investment.
