The year has kicked off in full motion.
Most of us are back at work, ready to take the bull by the horns. With our New Year’s resolutions in check, we are motivated more than ever before. Some of the common resolutions are changing your eating habits to live healthier, losing weight, reading more or doing more outside activities, like gardening, fishing or camping. The latter are all great resolutions, but I deem my value investing resolutions for 2015 the most important.
It is vital to set goals for yourself. It motivates and drives us to reach our targets and keeps us focused on making great investments to achieve even better returns.
I gave some thought to resolutions of my own for 2015, which would be helpful to any aspiring value investor. Here are the top ten New Year’s resolutions for an ambitious value investor:
1. Revise your investing approach
Are you still happy with the approach that you followed in the past or is it time to tweak it up a bit?
People change over time, affecting our overall attitude towards risk and investing. The amount of risk, you were willing to take on in 2014, might not be suitable for you in 2015.
You should revisit your approach. Familiarise yourself with the principles of your strategy just to remind you why you decided to follow your approach. Doing so sets your mind right back on track and ready for the year ahead.
If you feel you are ready to take on more risk for more reward or you want lower volatility even though it might mean fewer rewards, change your risk-profile by allocating your assets differently.
2. Allocate your assets for minimum risk and maximum reward
Asset Allocation is the practice of spreading one's money across a number of different investment vehicles to reduce risk while generating desired returns.
Knowing how to allocate your assets are extremely important if you want to achieve your desired returns. The key to doing so is dividing your money across asset classes of differing risk, market cap, industry, geography and currency. In doing so, you will have lower risk instruments offering safety and stability, which in turn counterbalances the higher risk associated with equities.
Before you start allocating your assets, you need to determine your investor profile. Investor profiles differ in the amount of volatility and percentage of returns of each profile. The investor profiles, you can choose from, are: cautious, mindful, confident or bold.
Which investor are you?
We help you identify your investor personality, determine your risk profile and understand the different asset classes and how they can work for you in our Asset Allocation and Effective Portfolio Management Part One eBook. Find out which type of investor you are by downloading your complimentary copy now.
Avoid having your eggs in one basket. If you haven’t diversified your portfolio yet, 2015 is the year to do so.
It may be possible to make great long-term investment returns from one stock, but it is equally possible to lose everything. You have a 50% chance of success, which is similar to gambling. By allocating your assets correctly, you will automatically be diversifying your portfolio. Diversification buffers your portfolio against market risk, lowering the volatility of your portfolio.
4. Don’t follow the herd
You are investing your hard earned money, not money from the masses. So why follow what others are doing? Rather do the opposite. Taking a contrarian approach has in most cases proved to be the best approach.
As a value investor, you should welcome market fluctuation and see it for what it’s worth. If the masses panic, selling all their assets it creates buying opportunities for us.
Set out to only make decisions based on fact not fiction fabricated by the media. You might have made mistakes in the past, but this year you will only make decisions based on facts and proven data.
5. Create a value investing checklist
I have learned that having a checklist by your side helps making informative trading decisions much easier and effective. By marking off all the points on my checklist I can confidently say my trading choices weren’t motivated by emotion, but solely by cold hard facts.
Investing can be a tough emotional journey, which many investors fall victim to. People panic when the market fluctuates and sells or buys at the wrong times.
Make sure you make the best decisions by checking off your value investing checklist. An example of a checklist that I use when managing my portfolio is available in one of my previous articles, The Value Investing Checklist to Effective Portfolio Management. It works great for me; it might do the same for you.
6. Manage your portfolio effectively
With regards to portfolio management, less is more. The less active you are, the better your returns will be. Circumstances do change, and so you need to know how to adapt your portfolio to those changes. You also need to calculate the ideal slice size model for your equities.
Have you ever asked yourself the following:
- How exactly should you divide your equities section?
- How many stocks should you own? How much should you invest in each holding?
- What should you do once those investment 'slices' start to grow?
- When is the best time to sell a stock?
- When should you react to news of an impending recession?
If you have been pondering on the latter questions, we have the answers for you in Part Two of our Asset Allocation and Effective Portfolio Management eBook series.
Based on our Long-term Profit (LTP) equation we have developed a portfolio management philosophy of principle over panic, facts over fear and allocation over activity. Using this to guide stock selection, slice size model and rebalancing strategy enables us to achieve consistent, market-beating returns; regardless of our personal specifics and investor profile.
Download your complimentary copy and start managing your portfolio effectively.
7. Keep fees low
Fees can rake up very quickly depending on the volumes in which you trade and the trading platform you are using. Follow the STRIDE LTP equation and find the cheapest online trading platform without hidden fees, and you will be well on your way to building a great returning portfolio.
8. Reinvest your returns for compound interest
Receiving returns on your investments are lovely but don’t spend it this year, rather reinvest it.
Compound interest is often called one of the most powerful concepts in finance. It can significantly increase investment returns in the long run. Reinvesting your returns in strong businesses is the best way to spend your returns and keep your money growing. You make interest on top of your existing interest.
9. Only invest in value
How do you know if you are truly investing in value? Fundamental analysis.
Fundamentally analysing a company allows you to determine the value of its assets. If you want to learn more about fundamental analysis and how we use it to determine fair value you can read Fundamental Analysis: Giving You More Value For Less Money and Buffettology: The Best Time To Buy A Stock.
10. Never stop learning
The most important resolution of them all.
You can never have enough knowledge of the stock market. There will always be something new to learn. Stay ahead of the curve by reading and learning from the investment gurus. It’s great to learn from their past mistakes so you won’t fall in the same trap.
Doing research and comparing data will be the only way you will be able to make sensible investment decisions. Don’t phase yourself by analyst opinions and so forth, rather read financial statements and quarterly reports. Always remember knowledge is power.