Finding shares to buy for a good night’s sleep!

Our writer explains how he aims to avoid having to lose any sleep over his stock market investments when deciding what shares to buy and hold.

| More on:
A GlaxoSmithKline scientist uses a microscope

Image: GlaxoSmithKline

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I once owned shares in mattress maker Tempur Sealy. The company may have made good mattresses for a relaxing slumber. But was it the share to buy for a good night’s sleep as an investor?

The question is more serious than it sounds.

A lot of people lose sleep over their investments. It does not have to be that way.

As billionaire Warren Buffett says, “when forced to choose, I will not trade even a night’s sleep for the chance of extra profits”.

Why shares can lead to sleepless nights

There are a few reasons why shares might keep someone up at night.

Sometimes a share is heading ever lower and it looks like it might end up going to zero if things do not get better.

Taking a big loss can be psychologically unsettling, but financially still not as bad as losing one’s entire investment.

Indeed, at the moment I am wondering whether my Superdry shares will recover or whether I ought to sell them now for pennies while I can.

Another concern can be that a company will need to raise more cash and so decide to issue new shares. Sometimes buying them is throwing good money after bad (if one even has spare money to invest at the time of such a rights issue).

But not investing reduces one’s stake in the company. Even FTSE 100 companies like Ocado have repeatedly tapped shareholders for more cash.

Dividend tap suddenly runs dry

Another concern that could keep one awake is dividend cancellation.

If an investor has a big stake in a company with a juicy dividend that suddenly cancels the payout, it can leave an unwelcome hole in personal finances.

Direct Line (LSE: DLG) did that just last year.

Even worse, such a surprise cut can often lead to the share price falling (the Direct Line share price fell 18% last year).

So selling after a dividend cut might lock in a paper loss on the shares’ worth. But holding in the hope of price recovery can tie up funds for years or decades, potentially earning zero dividend income along the way.

Figuring out what to do

How could I try to minimise the risk of trading a good night’s sleep for profits, as Buffett says?

One simple move is finding a diverse range of shares to buy.

Spreading the risk means that any one share badly underperforming my expectations will have a limited impact on my overall portfolio performance.

I think looking out for warning signs can help too, whether when finding new shares to buy or revisiting the investment case for an existing shareholding.

When I looked at Direct Line’s high yield in 2022 and then watched it get higher, reaching the mid teens, I wondered what was going on.

Was this an incredible high yield bargain, benefiting from a large customer base and iconic brand? Or was the yield a warning bell that other investors feared exactly what ended up happening – a dividend cancellation?

Simply by diversifying my portfolio adequately, ruthlessly focusing on high quality at an attractive price when finding shares to buy, and listening out for warning bells about an investment case, I think I can build a portfolio that lets me sleep soundly at night.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has positions in Superdry Plc. The Motley Fool UK has recommended Ocado Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

A pastel colored growing graph with rising rocket.
Value Shares

These FTSE 250 shares are tipped to rise 14% to 18% in the next year!

Looking for the best FTSE 250 momentum shares to buy? Here are two that City analysts expect to soar in…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Lloyds’ share price is up 20% in 3 months! How high can it go?

Lloyds’ share price has ripped higher recently. Here, Edward Sheldon provides his view on the level it could potentially climb…

Read more »

Investing Articles

Why the Rolls-Royce share price could continue to outperform

The Rolls-Royce share price keeps moving forward, but this Fool thinks it's still behind where it ought to be after…

Read more »

Fireworks display in the shape of willow at Newcastle, Co. Down , Northern Ireland at Halloween.
Investing Articles

The City expects explosive growth in earnings from this almost-penny stock

It’s rare to find earnings predictions as robust as those for this not-quite-a-penny stock, so I’d research and consider it…

Read more »

Investing Articles

As earnings rise 600%, is Nvidia still the best AI stock to buy?

With the supply and demand equation still looking strong for Nvidia, is the stock still the best AI opportunity for…

Read more »

Value Shares

Cheap UK stocks are soaring! Here’s 1 to consider buying now

In recent weeks, many UK stocks have surged. Here, Edward Sheldon highlights a blue-chip FTSE 100 share he believes could…

Read more »

Investing Articles

Top alternatives to consider as the IAG share price climbs!

I've been bullish on IAG shares for some time, but as the IAG share price pushes upwards from its pandemic…

Read more »

Investing Articles

£50k in savings? Here’s how I’d aim for a second income worth £60,000 a year

Many of us invest for a second income and the prospect of an easier life. Dr James Fox explains how…

Read more »