Self-directing your own investments can be tough. From learning the ins and outs of each sector, reading balance sheets, listening to earnings calls, there is so much information to grasp. However, following a set of guidelines to invest by and sticking to them can help you come out on top.
In this article, I will review three rules that have helped me — and hopefully you can apply these to your own investment strategies.
Invest in what you know
There are eleven sectors in the stock market: consumer discretionary, consumer staples, energy, financials, health care, industrials, information technology, materials, real estate, telecommunication, and utilities. It is often taught to diversify, but over-diversification can be a quick way to find yourself in trouble.
Peter Lynch, well-known for his 29% annualized rate of return as the manager of the Magellan Fund, has been known to preach this concept. Lynch was a believer in investing in industries where you have an advantage over the average investor.
For myself, as someone more exposed to technology, it is only natural that I find myself investing in companies such as Shopify and Lightspeed. If you work in retail, perhaps you would be more comfortable investing in Metro or Loblaw.
By sticking with industries that you are familiar with, it will be easier to understand business models, balance sheets, and which companies have a competitive advantage.
Remove emotions from the equation
This is much easier said than done, but it is very important to remember in case another market crash occurs. On March 12, during the market crash caused by the COVID-19 pandemic, the S&P/TSX Composite Index dropped by 12.34%, marking the largest single day drop since 1940.
Meanwhile, in the United States, the top six largest drops in the Dow Jones Industrial Average all occurred during the 2020 pandemic. Big moves by the market as witnessed during these events can easily unnerve investors.
What can be done to help you invest without emotion? One strategy would be to decide how much money you can afford to invest every other week, or every month, and consistently contribute that same amount no matter the economic condition.
Doing so would keep you from being hesitant to buy during all-time highs and missing days that provide excellent returns. It would also ensure that you take advantage of market lows, instead of waiting for “a better opportunity” and missing out on potential gains.
Sell as little as possible
There is a very cheesy expression that I believe is true: “Your portfolio is like a bar of soap. The more you handle it, the smaller it becomes.” This expression states that the more active you are, the tougher it will be to see market-beating returns.
In 2000, Brad Barber and Terrance Odean published a study investigating this concept. The authors found that there was an inverse relationship between portfolio turnover and performance, as portfolio turnover increases, the rate of return decreases.
The Motley Fool generally preaches to buy companies with the intention of holding them forever. This concept can be put into practice by exploring the recommendations in services offered by Motley Fool Canada.
There are an incredibly larger proportion of buy recommendations than sells. By reducing the number of sells, you allow more runway for your positions to grow and you also cut down on fees (e.g., transaction fees), which can eat away at your returns.
Investing is a tough endeavour. By sticking to a systematic approach, you will be able to navigate the market more easily. Consider investing in industries you are familiar with, removing your emotions from the equation, and selling shares as little as possible and see how much better your returns become.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Jed Lloren owns shares of Lightspeed POS Inc and Shopify. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify and Shopify. The Motley Fool owns shares of Lightspeed POS Inc.