For the stock market, April was one of the best months on record since 2009. But don’t get over-optimistic. The last day of the month saw a dramatic rise in volatility and a FTSE 100 dip due to US-China tensions. So how do you continue to build your portfolio and hopefully rich? By following some simple steps.
The best ways of getting rich, I feel, include buying undervalued companies with a great competitive advantage and buying them for the long term. I’d also like to add some additional tips for this bear market.
Choose the ‘right’ shares as the FTSE 100 crashes
I think choosing shares with wealth-enhancing potential includes buying companies that trade at low multiples — that is, low price-to-earnings and price-to-book ratios. Nowadays, for example, airlines are historically cheap. But even though it’s possible that the government could bail out the largest industry players, it might take them plenty of time to return to profitability.
This seems to be the case with easyJet. Despite being one of the largest FTSE 100 airlines, it’s struggling with liquidity issues. The Treasury and the Bank of England agreed to provide the company with a £600m loan but easyJet’s largest shareholder still thinks it could run out of liquidity by year-end. The point I’m making is that buying such a company’s shares presents a substantial risk, but could turn out to be hugely profitable if the situation gets materially better.
Are there any ‘safer’ options for conservative investors? Yes. Such options would include non-cyclical companies with sound balance sheets and excellent credit ratings. Such shares are still available at a discount due to the coronavirus pandemic.
Diversification to avoid losses
Diversification is probably one of the most important investment principles. It’s true that individual shares should be chosen carefully, but you never know what might happen to one share in one sector. For example, no one expected back in January, when the stock market reached its historic high, that oil prices would turn negative. Many investors and analysts expected a global economic recovery. As a result, they were reasonably optimistic about oil prices. Needless to say that these expectations haven’t been met. So over-exposure to oil shares would have hurt the value of your portfolio.
Instead, I’d choose a broad spread of companies that trade at a P/E ratio of below 20 or the FTSE 100 average P/E, and have good balance sheets. I’d spread my investments among 20-30 firms so losses in one area can be balanced by better performances in others.
Pound-cost averaging to get rich
We at The Motley Fool strongly encourage our readers to take advantage of stock market crashes. As time shows, crises come and go. The lockdown of the world economy will end. On the other hand, no one knows exactly when the FTSE 100 will reach its bottom.
Even though many countries are starting to open up, tensions remain. For instance, President Trump is blaming China for originating the virus. This situation could add to fears of a prolonged trade war between the US and China and therefore high volatility.
So what should investors do? There’s a good solution to share price volatility. It’s the pound-cost averaging method. This involves drip-feeding a small amount of money into share regularly. It avoids spending all your money at a peak and smooths out volatility.
