With just a couple of weeks left of 2024, many investors are thinking and planning ahead for next year. Given the valuation of many UK shares versus US peers, I imagine that there will be plenty of chatter about where to invest.
Yet as someone that’s been involved in the stock market for many years, there are a few key mistakes to avoid on this front.
Don’t confuse the index with individual stocks
The FTSE 100 hit all-time highs earlier this year. Next year, I believe the index will trade even higher, possibly above 9,000 points. Due to this, some investors might shy away from buying FTSE 100 shares, arguing that it’s too expensive or that buying something at all-time highs isn’t a smart move.
This thinking confuses the index performance with stock performance. Even though the FTSE 100 might be at highs, there’s still value in individual stocks. It doesn’t mean all FTSE 100 shares are at all-time highs and overvalued.
So the mistake to avoid here is to not invest because someone thinks the index is overvalued. With the right research, opportunities can always be found for good value stocks.
The issue with REITs
Some investors will look at UK property real-estate investment trusts (REITs) as a cheap area to buy. They’ll flag up the fact that for several, the net asset value (NAV) of the portfolio is higher than the share price. In some cases, this can be a 20%-40% discount.
For example, consider the Schroder Real Estate Investment Trust (LSE:SREI). The current dividend yield’s 6.73%, with the stock up 10% over the past year. The share price currently trades at a 19% discount to the NAV. It was last equal to the NAV back in late 2016.
It’s true that in the long term the share price should rise to around the same level as the NAV. Yet this can take several (indeed many) years to happen!
One reason why this REIT has the discrepancy is because commercial real estate’s fallen out of favour with investors over the past couple of years. The shift towards more flexible working since the pandemic has caused some to sell property shares, even though the value of the REIT portfolio hasn’t materially reduced.
Of course, the generous dividend yield’s still attractive for income investors. The trust has increased dividend per share payments for several years. But I feel it would be a mistake to consider this stock purely on the expectation of a share price rally back to the NAV in 2025.
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Looking at 2024 themes
Some areas in the market did very well in 2024. For example, the banking sector. Yet not all themes will play out the same way next year. Banks are likely going to come under more pressure with interest rates getting cut from countries like the UK and US in 2025.
The rise of AI in 2024 is a theme that could continue next year. But the point is not to assume that just because one sector did well last year that history will repeat itself in 2025.
