Are you feeling a bit blue lately because your investments are not achieving your desired returns, even though the market is growing?
It is time to face the facts. If your portfolio is underperforming in a growing market, you or your fund manager are clearly following the wrong strategy or applying ineffective investing principles. The main goal of investing is to create wealth. If you are not creating wealth for yourself, you need to make a change. Personally, I have found that applying the correct set of principles combined with the following four factors can do wonders for your portfolio’s performance.
1. Pick 3D value stocks
How do we go about picking unloved value stocks with exponential growth potential at lower risk? By evaluating a company based on a combination of fundamental analysis, valuation and timing. The combination of the three dimensions forms the premise of 3D Value Investing, a methodology that triangulates the best investment opportunities. If you are interesting in learning more about 3D Value Investing, click here.
Ultimately the shares that you want to purchase are unloved value stocks, at a margin of safety. You don’t want to catch a falling knife, so refrain from purchasing stocks on the down slope. Rather focus on buying shares in the recovery phase, to avoid unnecessary emotional stress. A company worth buying for the long-term is one that:
- Has aligned fundamentals
- Shows upright growth potential
- Has an economic moat
- Allows for a decent margin of safety
- Is in the recovery phase
2. Diversify your portfolio
The lower the risk, the better the reward. Diversifying your portfolio across various asset classes, countries and currencies create a buffer against market volatility and fluctuation. If your assets are widespread across the globe, your portfolio won’t drastically be affected by political or economic pressures because global markets can flourish and tank simultaneously. The flourishing market will carry the weight of those underperforming.
For example, the following table represents the historical performance of the S&P 500 over the last eighty years. If you had a diversified portfolio, the years of weak returns of the S&P 500 wouldn’t have affected your portfolio as harshly as someone who only invested in stocks listed on the S&P 500. The geometrical average of the returns delivered by the S&P 500 between 1928 and 2014 is 9.60%. With a diversified portfolio, the returns would have been higher, due to the balancing effect of diversification.
Diversifying your portfolio is a wise choice for every value investor.
3. Fly solo
If you had to tell me a year ago that I can achieve market-beating results by investing on my own, I would have doubted your intellect. I would argue that there is no possible way for me to do a better job than the investment professionals. I have been proven wrong.
You and I can quite easily achieve market-beating returns by investing independently. There is no longer a need for investment advisers or fund managers managing your investments. You can do it on your own.
As most fund managers struggle to match the market, you are clearly better off on your own. I am saying this because I realised the potential of individual investing by following a working mother’s value investing journey.
Since the beginning of 2015, I have been following the performance of the Little Acorns Portfolio, and I am fascinated by it. Without extensive knowledge prior to investing, she decided to invest her savings using a stock picking and portfolio management tool. Her journey is the perfect example of an individual investor taking the markets by storm and the fund managers out to the proverbial woodshed.
4. Have a long horizon
Always remember that time is your best friend and keep your sights set on the horizon. To quote one of the greatest investors of our time, Warren Buffett: "Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."
With this quote, Buffett speaks the absolute truth. By looking at the S&P 500 index’s performance over the last eighty years, you see it performing utterly well in some years and poorly in others. But taking the entire picture context, we can conclude that the market will produce great returns over the long-term.
Buy and hold rather than trading at every given moment. Avoid extensive trading practices at all costs, as it eats into your returns. With every trade, you pay fees and taxes that can outweigh your gains if you trade too often. That is why the buy and hold strategy is the most effective.
Turn your frown upside down by incorporating the factors mentioned above into your investment strategy. You will soon be noticing the effect it has on your portfolio. For the best results, incorporate a combination of all four factors. As separately they won’t be as impactful on the outcome of your performance.
Achieving great returns can be easy if you have the correct foundation and principles in place. By picking sound value stocks, diversifying your portfolio, independently managing your money and having a long-term objective, you will be able to achieve your financial goals with better investment returns.