Well-known money-saving guru Martin Lewis recently strayed from his usual remit by talking about the stock market. Interestingly, he flagged up some great points, such as the UK’s general underinvestment and the fact that being too risk-averse carries its own risks.
However, when discussing areas to invest, he missed the chance to provide even more value to his followers. Here’s what I’m talking about.
Going one step further
Lewis explained that if you’ve been keeping money in savings accounts, even high-yield ones, inflation means you’ve effectively lost value. That’s why investing can outperform savings over the long term. Of course, nothing’s guaranteed, but I’ve always had this mindset. With surplus funds that an investor won’t need for the next few years, putting them to work in the stock market can be a good option.
However, the focus from Lewis was on using index funds, tracking indexes such as the FTSE 100, instead of picking specific stocks. In some ways, I get why he was recommending a passive approach to investing. Most of the people who follow Lewis aren’t experienced in active stock picking. Therefore, buying a tracker can be perceived as an easy, low-risk way to start in the market.
Yet the more I think about it, the more I think he missed out on talking about owning a diversified mix of a dozen stocks that an investor has high conviction in. A diversified spread can help reduce risk (like a tracker). But it can also potentially deliver returns better than simply following the benchmark.
Of course, being active in picking stocks isn’t for everyone. But with a long-term time horizon and some solid research, I think it’s a much better way to put money to work in the stock market.
An example to consider
Aviva‘s (LSE:AV) a stock that could be used as part of a varied investment portfolio. It’s a FTSE 100 company that most have heard of, operating a relatively simple business model for offering various forms of insurance and asset management.
It makes money primarily through insurance. Customers pay premiums for policies such as car, home, life, health and commercial insurance. Aviva earns premiums after paying claims to policyholders. In addition, the business manages pensions, savings and investment products. It charges fees for providing these services to the end clients.
Over the past year, the stock’s up 47%, in contrast to the 21% gain from the FTSE 100. Even over a longer five-year time horizon, the share price has risen by 118% versus 51% for the index. I believe it’s a good example of a company that can continue to grow profits, helping the share price rise further.
Based on the operating model, I don’t feel it’s a high-risk stock. Given regulatory oversight, it maintains a robust solvency ratio and strong cash balances. Therefore, I don’t see it getting caught up in financial problems anytime soon.
As a risk, the business is exposed to black swan events, which could trigger a sharp spike in insurance claims. Further, if the investment managers underperform, people could pull their money from Aviva, reducing the fee income.
Even with this, I think it’s a good company that an investor could consider buying as part of a beginner portfolio.
