Five tips to get your 2021 investment year going!!!
BY: NICHOLAS RIEMER
2021 IS now upon us, and the typical resolutions of going to the gym, eating better, and buying that new car have been replaced with staying healthy and ensuring our livelihoods are maintained. Long-term investing and saving continue to play a key role this year, and building a solid stock portfolio should be a key resolution when growing wealth sustainably.
Over the long-term, stocks have provided higher returns than bonds, treasury bills, gold, or money market accounts. Investing in stocks over a long period of time has given investors both dividend income and capital appreciation. Combining these two return streams makes for solid long-term returns.
Investors can own individual shares, or mutual funds / unit trusts (which is a composition of different stocks into one single fund). Applying basic investment principles can assist investors in the se-lection of the shares or funds in which to invest.
When it comes to investing, consistency is key, and applying basic principles consistently will yield consistent returns.
Five tips to make 2021 a year for investing:
Buy stocks regularly, regardless of the market noise
Trying to predict the stock market’s direction, so that you’re only buying stocks when the prices are low or only selling when the prices are high, has never worked over a long period of time. Stocks can be high in price and continue to go higher, meaning that you are missing out on potential returns sticking to that single strategy.
Despite the stock market ups and downs, stock prices over the long term have continued to increase. Long-term investors are better off taking the long view, and investing set amounts regularly. This will result in an increase in dividends received from more shares, and a chance for your capital to grow consistently over a longer period.
Reinvest all earnings
Reinvesting those insignificant dividends or small capital gains, will mean increasing the number of shares in your portfolio, thus increasing the potential for dividends received and capital gain. Re-investing money back into the market means growing your portfolio from 100 shares, to 120 shares, to 150 shares, and so on.
Invest in stocks in which you understand the business
In 2021, invest in quality, not in cheap stocks. Invest in companies that you understand or have dealt with before, and that are set to thrive in this new economic climate the globe finds itself in. If you only shop at Woolworths because they are the best in your opinion; and you enjoy all their products, customer service, and have done some research on their other revenue streams and strategies that the company has adopted, then invest in Woolworths.
Secondly, look for growth. See how the revenue of the company is growing from year to year. You can get a company’s financial statements from their website. Get an idea of how that company’s sales are growing. Compare it to the average South African growth rate. With quality growth companies, sales growth leads to earnings growth—and earnings growth leads to growth in share prices and higher dividends.
Diversify your stock market investments to reduce risk
Every investor has made mistakes, be it missing an opportunity or investing in a non-performing stock. By diversifying your portfolio this year, you will limit the damage of these mistakes, meaning a mistake may not be as costly when diversified. Two stocks may be down for the year but the other three you have invested in are up, meaning as a whole your portfolio is up for the year. Diversifying your portfolio will improve returns substantially over the longer-term.
To diversify this year, look to balance your portfolio by looking at different industries, different company sizes, different stages of the business, blue chip stocks, mid cap stocks, etc—and most importantly, globally.
FNB have introduced their offshore ETN offering, giving investors the ability to obtain offshore exposure to some of the biggest international companies by market capitalisation. Just investing in SA means that all your eggs are in one basket. International markets are growing and behaving differently to the global pandemic news. 2021 is the year for global inclusion to assist spreading portfolio risk.
Limit the number of shares to 10
In order to be consistent in understanding the stocks you are investing in as well as their growth potential, limit the number of stocks in your portfolio. Rather reinvest dividends back into the same performing stocks as opposed to buying something you may not fully understand. Remember that age old saying, don’t change what’s working.
Your revised new year’s resolution
Warren Buffett has always studied potential investments the same way. So has legendary mutual fund manager Peter Lynch. These great investors might have different ways to find stocks, but they all maintain a consistent philosophy, approach, and full understanding of the companies that they are investing in—no matter what the market is doing.
If you invest in quality shares at reasonable prices, you will be following the professionals’ mentality to investing this year. Find those shares, and include them in your 2021 resolutions.
Nicholas Riemer is head of investment education at FNB Wealth and Investments.
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