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A stock picker’s guide to uncertainty

As most of the UK enters the third national lockdown, we share our three top tips to maximise your chances of investing success.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Coronavirus swept across the world in 2020 and has since had a huge impact on all of our everyday lives. And it’s not stopped there. Companies, stock markets and economies around the world have all been severely hit by the pandemic.

Things are starting to look a little more positive with vaccine roll outs and some signs of a recovery in the economy and stock markets. But uncertainty still lingers.

Nobody knows what will happen in the months ahead. But we do know that keeping your investments well diversified across a range of sectors, geographies and investment types is one of the best ways to spread your risk.

“Diversification is the only free lunch [in investing]”

NOBEL PRIZE WINNER HARRY MARKOWITZ

Investing is not a game

You might have done your research, and you might be sure that you’re onto a winner, but at the end of the day, there are no guarantees. And with one bad run, you could end up sacrificing a large chunk, if not all, of your money.

Spreading your money across different holdings is not just sensible, it’s essential in our view. Your wealth is important, so you should look after it. It’s what you need to reach your financial goals or carry you through your retirement years.

So, if you don’t have the mind-set of keeping your investments for the long term, then you shouldn’t be investing.

“If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes’’

WARREN BUFFETT

How to tighten up your investment portfolio

Now’s a good time to review your portfolio and make sure that you’re in good shape for the road ahead.

Here’s a simple three-point checklist to help you make sure you’re ready for any potential market storms to come.

1. Check your risk

How much do you have invested in one stock? If it’s more than 10%, we think you might have a problem. That’s probably too much risk to put in one company. History is riddled with over-confident investors who put too much money into one “fail-proof” venture.

Spreading out your wealth also spreads out your risk. It might be tempting to invest heavily in one sector (like tech, healthcare or consumer staples) today. But try to take a step back and consider how your investments will look over the next twenty or so years. Today’s hottest stock could be tomorrow’s laughingstock.

2. See if you have enough diversification

Finding the right amount of diversification for you is more of an art than a science. The stock picker’s answer would be to focus on your best ideas, and avoid diluting your portfolio with shares you don’t really believe in.

The academic answer would be own as many investments as you can keep track off. We all have different demands on our time, so the exact number will depend on your personal circumstances.

How many you hold will depend on your confidence in your share picks and your tolerance for risk and volatility.

However many stocks you have, one of the most time and cost-efficient ways to diversify is through investing in funds. Active funds are a collection of investments chosen and managed by a professional manager or company – they’ll do the day-to-day management within the fund.

You can also invest in index tracker funds, which are designed to track the performance of a particular stock market or index, like the FTSE 100 or S&P 500.

If you’re comfortable picking your own investments and want more ideas you could think about the Wealth Shortlist. The Shortlist is a collection of funds selected by HL analysts for their long-term performance potential.

Please note investments can go down as well as up and you may get back less than you invest.

3. Think about a core-satellite investment strategy

While a core-satellite investment strategy might sound like a mouthful, in reality it’s a very simple idea.

If you have some stocks that you love and believe in, of course you should feel free to invest in them. But it shouldn’t be your entire investment strategy. Individual companies are normally better to add a personal spin on your wider portfolio. This style of investing is known as a core-satellite strategy.

As a core-satellite investor you’ll have a main group of investments, well-diversified and matching your risk profile – known as the ‘core’. This is normally quite a sensible mix of funds and some cash (depending on how soon you’ll need it).

Then, for that added pop of adventure and even more diversification, you might have a few stocks that you think will do well in the long term on the side – known as the “satellites”.

Some of the ideas in our Five funds to watch for 2021 could be considered for part of a good core. While ideas from our Five shares to watch for 2021 could be considered for smaller satellites.

This article isn't personal advice. If you're not sure if an investment is right for you make sure you ask for advice.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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