One of the greatest challenges of investing in shares is controlling your emotions. It’s all too easy to become excited and overconfident about the performance of an investment portfolio following a Bull Run. After all, last year saw the FTSE 100 deliver a total return in the double-digits, which is likely to have helped swell the value of most investors’ portfolios.
However, the reality is that a bull market never lasts in perpetuity. A bear market is always on the horizon. As such, focusing on the fundamentals of investing could help Foolish investors stay ahead of the FTSE 100 in 2018.
An honest approach
With share prices having risen sharply last year, many investors may be tempted to take greater risks than they normally would. This could be because many of their investment decisions of recent years have proven to be correct, and they may be feeling relatively confident about their ability as an investor.
The reality, though, is that a rising portfolio is likely to have benefitted significantly from increasing share prices. Economic policies such as low interest rates across the developed world have provided strong trading conditions for a number of companies and sectors. In turn, this has provided catalysts for profit growth, which has delivered rising share prices across a range of industries.
As such, a focus on the potential for losses as well as for gains may help investors to maximise their own overall performance in 2018.
A long-term standpoint
Clearly, it is easy to become highly enthusiastic about the performance of share prices given that the index is at record highs. In the short run, more capital growth could be ahead. However, in the long run there is a good chance of economic difficulties and even a recession. Therefore, focusing on the long-term potential of a business before buying it could be a shrewd move for investors to make.
For example, a company may be highly profitable today, but its success could be built upon a risky balance sheet. Similarly, high levels of profit may be unsustainable, or a company may lack the diversity to survive a recession. By focusing on the sustainability of a company’s business model and its capacity to perform well in a variety of economic conditions, an investor may be able to gain an edge over the wider index.
One area in which there could be significant upside potential is dividend stocks. Investors seem to be highly enthused about the growth potential for cyclical stocks at the moment, and this has pushed their valuations higher. However, with inflation at 3.1% and having the possibility of edging higher this year, dividend shares could become more popular as the year progresses.
As such, buying a range of companies that pay generous dividends which could increase in future years may be a sound means of outperforming the FTSE 100 in 2018 and beyond.
Peter Stephens has no position in any 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.