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Making a million could be easier if you invest like Neil Woodford

This year has been one to forget for Neil Woodford. His performance has been relatively disappointing, and it has caused many investors to question his ability. However, no investor can outperform their benchmark all of the time. And in his career, he has generally delivered high returns for his investors. That’s why investing like him could make becoming an investing millionaire much easier.

Defensive income

Neil Woodford is primarily known as a defensive income investor. This means that he has often focused in the past on stocks which offer a mix of relatively impressive income investing prospects, while also offering robust business models. This strategy could be successful in future for two main reasons.

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Firstly, defensive shares may deliver relative outperformance over the medium term. Certainly, the stock market is in the midst of a major bull run at the present time. The FTSE 100 has recently reached a record high, and investor sentiment is on the up. However, bear markets inevitably follow bull markets, and buying stocks which are less highly correlated to the wider economy could prove to be a shrewd move in future years. In addition, such shares may now offer good value for money, since many of them have been unpopular on a relative basis this year.

Secondly, focusing on dividends can lead to higher returns in the long run. History shows that the reinvestment of dividends can have a significantly positive effect on portfolio performance as a result of the effect of compounding. Furthermore, companies which pay generous dividends often have a stronger financial outlook than those that do not. That’s because they can afford to pay a higher level of dividends, while their management team may be more confident in their earnings outlook.

In addition, dividends may become of even greater importance in future. Inflation is forecast to move higher, and stocks which can offer a real income return could be in demand to a much greater extent by investors.

Smaller companies

As well as investing in defensive growth stocks, Neil Woodford also buys relatively small companies. They may be risky, but can also offer high rewards. In fact, history shows that small-caps can offer superior returns in the long run than their larger peers. This may be because of less coverage by market analysts which leads to more asymmetric risk/reward opportunities. Or it could be that smaller companies, by definition, have more scope to grow due to their relatively low base.

Either way, smaller companies can be a worthwhile investment in the long run. However, diversifying among a large number of them could be crucial to overall success. Uncertainty in small-caps is generally high and buying a wide range of them in a number of different sectors seems to be a shrewd move.

Takeaway

By focusing on defensive dividend stocks as well as smaller companies, investors may be able to generate improved returns in the long run. Neil Woodford may have endured a difficult year, but his track record suggests that his methods are sound and could be worth adopting in 2018 and beyond.

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