So you’ve done your research, spoken to friends and acquaintances and are finally sold on the idea of investing in the share market. But don’t press the “buy” button on any stock until you finish reading this article.
Understanding the numerous advantages to share market investing is the easy part. These can range from securing your retirement savings to generating a good return which enables you to put a deposit down on a property.
Or perhaps it is the interest rate outlook that is prompting you to seek a better alternative to the dwindling returns on your savings or term deposit accounts?
These are all great reasons, but before you move to the next step, there are three key things to portfolio success that you will need to be aware of.
Understanding the psychology of investing
Volatility is a reality for all investors, which should be embraced rather than feared. The effects that volatility has on the market will often create opportunities for smart investors who have the patience to take advantage at the right moment. These smart investors benefit from their ability to block out the market noise, which often misleads many others and causes knee jerk reactions. An example of this is when….
It is also worth noting, a stock that is continually on an upward trend will at some stage be setting itself for a crash. Often, a stock must come back down and consolidate at a lower level to make the longer term uptrend more sustainable.
Stock selection and rejection
The recipe for developing a successful share portfolio boils down to how you select your stocks. The ability to choose good companies and avoid the weak ones will ensure you keep comfortably ahead of the market.
Selecting fundamentally healthy stocks with a good management team and with prospects aligned to your investment are key to you building the foundations of a successful portfolio.
It also helps to have a robust framework for your share selection strategy. This will allow you to make sound decisions on which stocks to buy and sell.
It’s a simple formula to follow – if a stock fails to meet your fundamental guidelines such as an unhealthy balance sheet or poor track record by management, then this stock should be replaced by another share that meets your outlined criteria and investment objectives
Portfolio construction and optimisation
In our experience, building and maintaining a share portfolio are the areas where most investors fall short and fail.
Many investors have plenty of enthusiasm when they begin investing, spending a lot of time researching and selecting strong stocks for their portfolio. It is once this enthusiasm begins to wane that investors begin to run into problems, leading to their portfolios becoming mismanaged or even abandoned.
Portfolio neglect is one of the key reasons why many investors fail. It is important to remember that a company performing strongly today may not be a good investment tomorrow. When the fundamentals of a business change, it is important that an investor is aware and ready to make to make the necessary changes before a stock negatively affects their portfolio.
In order to optimise your portfolio, you need to ensure that you stay true to your investment objectives and the level of risk you are willing to take on.
Being proactive in monitoring your portfolio will make all the difference to the performance of your investments.
Is your portfolio opitmised? Find out here with our Portfolio Health Check tool.
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