6 Tips For Stock Investment That Even Seasoned Investors Don’t Know About

The stock market offers a great opportunity to increase your wealth. Make the right investments at the correct price and you can earn high returns.

Unfortunately, it works the other way around too. Buy an overpriced stock and you could be stuck with it for years as you wait to recover your original investment.

Is there any way to make your investment strategy bulletproof? What can an investor do to keep risks under control while maximising returns?

Although there is no magic formula that can make this happen, there are some ground rules that you can follow to boost your chances of success.

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1. How much of your portfolio should be in stocks?

You could be tempted to allocate your entire portfolio to equities. After all, in the long run, the stock market has historically provided better returns than every other asset class. Fixed-income securities and money market instruments can’t offer a similar level of returns.

The stock market has moved upwards for the last 120 years

Source: MarketWatch

You can see a larger version of the chart here.

However, the logic of putting all your money into stocks is flawed because share prices are highly volatile in the short- and medium-term. Consider the fact that the market crash of 2007-08 saw the Dow Jones Industrial Average index fall from a high of over 14,000 in October 2007 to a level of 6,594 in March 2009.

What would you have done if you needed to raise money in that period? It’s likely that you would have made a large loss.

Instead of putting all your eggs in one basket, it is better to hold a diversified portfolio. Invest in shares, bonds, commodities, and even real estate. Some portion of your equity holdings should be allocated to foreign markets. A diversified portfolio will stabilize your returns and cushion your portfolio from the stock market’s volatility.

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2. Never underestimate a stock’s potential

Have you ever been in a situation where you sold a stock at a large profit a few weeks/months/years after buying it only to see it continue its upward climb?

That happened because you probably didn’t know that you were holding a “tenbagger” – a term that refers to an investment that increases tenfold in value.

Peter Lynch, the highly successful manager of the Magellan Fund at Fidelity Investments between 1977 and 1990, has this story to tell about how it is easy to miss the potential that a stock can hold.

He says, “I would have never bought Subaru after it already went up twentyfold. But I checked the fundamentals, realised that Subaru was still cheap, bought the stock, and made sevenfold after that.”

3. Holding for the long-term could be the best investment strategy

Warren Buffett is arguably the world’s most successful investor. His personal net worth stands at US$87 billion. One of the 87-year-old Buffett’s basic investment principles involves the length of time for which an investor should hold a stock.

In a 1988 letter to the shareholders of Berkshire Hathaway, he famously wrote that his “favourite holding period is forever.” He bought Coca-Cola stock in 1988 and American Express stock in 1991. He continues to hold shares in these companies, despite several decades having elapsed since his initial purchase.

4. Don’t get swayed by media reports

Remember that market volatility is the norm. Daily stock prices are affected by a variety of reasons. Political news, oil prices, the employment figures in the US, and interest rates, among other factors, may affect the price of the stocks that you hold. But that doesn’t necessarily mean that their value changes.

In most instances, it is advisable to ignore media reports. If stock prices fall because of adverse macroeconomic developments, it doesn’t necessarily mean that you should be worried. In fact, lower prices could signal a buying opportunity.

Instead of getting swayed by media reports, investors should spend their time learning more about the companies that they have invested in and the industries that they operate in. This will help you to understand whether your investment has the potential to grow in value. It could also help you to decide whether it is time to liquidate your holdings in a particular stock.

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5. Understand the concept of anchoring

In the context of investments, anchoring refers to comparing the current market price of your investment against a certain value. This could be the price at which you have bought a particular share or even some other arbitrary value like the maximum level that the stock has achieved.

To understand this concept, consider a share that climbed to S$50 and then fell to S$25. You made a purchase at S$30 in the expectation that the stock would rise to S$50 again or at least approach that figure. However, there may be a very valid reason for the share price to have fallen. You can’t expect its value to rise just because its historical price was S$50.

If you place your “anchor” incorrectly, your investment will not provide the desired results. You should buy (or sell) a share based on your expectation of its future performance and not on the anchor price that you have decided upon.

6. Get an iGM wrap account

One way that investors can boost their profits is by lowering their trading costs. Although you pay a relatively small sum for buying or selling securities, the amounts can add up over a period of time and negatively affect your returns.

iFast Global Markets (iGM) offers complete commission transparency in its investment products. Its wrap account, which is like a dedicated portfolio manager for stocks, unit trusts, and bonds, can help to reduce trading costs and consolidate all your holdings in one place.

iGM has one of the lowest processing fees at 0.06% with a minimum of S$10 for its wrap account. If you go in for a non-wrap account, you will pay 0.12% with a minimum of S$10. This facility is currently available for the Singapore and Hong Kong markets. It is expected that iGM’s offering will extend to the US market by April.

Another advantage with iGM is that your account is pre-funded. This implies that the account is a collateralized trading account where the trading limit is equal to the funds deposited into the account.

As the wrap account is applicable to stocks as well as bonds and unit trusts, it allows your iGM adviser to manage your portfolio while keeping transaction fees to the minimum.

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Buy when others are selling

Sir John Templeton was an immensely successful investor and the creator of the Templeton mutual fund. He built his fortune by bucking the investment trends of the time and buying when others were selling. His advice to “Invest at the point of maximum pessimism” is as true today as it was years ago.

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This article was written in partnership with iFast Global Markets. All views expressed in the article are the independent opinion of ZUU.