The recent crash has attracted many new investors to the stock market. And there are good reasons for that. Lower share prices can offer some bargain buys. And every new bull market follows a bear market, of some sort.
Indeed, many shares have been shooting up recently. But I reckon it’s a good idea to guard against some of the big investing mistakes that keep many nursing poor returns. Here are five things I’d aim to do as part of my investing strategy to boost my push for a million.
It’s unwise to go into any share without first doing your own research. I’d read the company’s news feed and investigate the trading statements and financial reports. I’d explore valuation measures and work out the consistency of profitability, among other things.
And don’t forget that your investment outcome depends on the forward prospects of the underlying business. In short, make sure you have a good reason for investing before you pull the trigger and buy shares.
It can be a mistake to over-diversify. Loading a portfolio with too many investments can lead to mediocre performance. We could end up with a performance that mirrors the wider market. In which case, we could have saved all the effort and expense and bought a tracker fund.
However, I wouldn’t concentrate all my funds in just one or two shares either. When it comes to diversification, I’d aim to find an optimum balance that matches risk with performance potential.
Patience and prudence
Whatever your investment strategy, waiting too long for returns can cost you dearly. As investors, it pays to be patient. But, at some point, I’d decide to be prudent. And that means selling out of investments that are underperforming and moving onto brighter prospects instead.
Some investors advocate averaging down and buying more shares in a losing investment. Usually, the rationale is based on a strong opinion about the prospects of the underlying business and the argument for cheapness.
But I wouldn’t average down if a share moves against me. If it does, I’ve already been wrong once, so why risk being wrong again by buying more? If the share is going to turnaround and perform for me, it will do so with the original investment I made anyway, without the need to double-down.
Rather than averaging down, I’m more likely to cut my loss and sell out altogether. It’s normal to be wrong about some stocks, but there’s no need to keep on being wrong about them. One of the biggest threats to a portfolio is the way losing positions can keep the overall portfolio from out-performing. It’s no good riding your winners if you ride your losers too!
As well as picking the ‘right’ shares in the first place, the way you execute the management of your portfolio will likely have a big effect on your returns. Good luck in your investing journey!
Kevin Godbold has no position in any share 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.