Kier and Thomas Cook shares: one lesson all investors should learn from their 88% slumps

Diversification should remain a key priority for all investors, Peter Stephens believes.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

Over the last year, the share prices of Kier and Thomas Cook have fallen by around 88% apiece. Clearly, the two companies are enduring highly challenging periods that could continue over the near term.

While it’s disappointing for any investor with shares in one or both of the companies, it brings to light the importance of having a diverse portfolio of stocks. Failing to do so could mean an investor is exposed to a high degree of company-specific risk that ultimately causes a significant amount of volatility over the long run.

Reduced risk

Although all investors would love to be able to pick just a handful of top-performing shares to hold within a portfolio, the reality is that poor performance can be exceptionally difficult to accurately and consistently predict.

Certainly, some risks can be identified. They may include weak consumer confidence for retail shares, or the prospect of a challenging economic period that may impact negatively on a wide variety of sectors.

But in some cases, profit warnings and financial challenges are unforeseen by even the most experienced investors. As such, it makes sense to reduce company-specific risk, so if one holding within a portfolio experiences a declining market valuation, its impact on the wider portfolio is somewhat limited.

Risk/return

Of course, there will always be an element of risk from investing in the stock market. It’s impossible to diversify away market risk, which is the prospect of market cyclicality affecting a portfolio’s valuation, without buying other assets.

But, over the long run, indexes such as the FTSE 100 and FTSE 250 have always recovered from downturns to post higher highs. Therefore, investors may wish to focus on reducing company-specific risk, rather than market risk, should they have a long-term time horizon.

Furthermore, having more stocks within a portfolio may allow an investor to capitalise on a wider range of growth trends within a number of different sectors and regions. Since there are a variety of appealing trends and industries at present that could offer strong growth prospects over the long run, now could be a good time to consider increasing a portfolio’s diversity.

Accessing shares

With the cost of buying and selling shares having fallen significantly in the last couple of decades, owning a wide range of stocks is becoming cheaper. For smaller investors who wish to reduce their commission costs even further, the regular investing services offered by online sharedealing providers could cut the cost of buying shares to as little as £1.50 per trade.

Doing so could allow you to limit the impact of poor performances such as those recorded recently by Kier Group and Thomas Cook. With a rapidly evolving economic outlook, there are likely to be other shares that significantly underperform the wider index over the coming years. Although diversification may not help you to avoid them completely, it could mean their performances do not destroy your portfolio’s overall growth trajectory.

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.

Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »