I made a lot of mistakes when I first started investing. I watched the market and listened to the news every day because I felt that that was what was important. But instead, it was overwhelming, stressful and, most importantly, expensive. Eventually I realised that, if I want to be successful, I should learn from the master. After devouring all the letters, books and speaking events I could find, these are three of Warren Buffett’s key rules I follow when considering stocks for my portfolio.

1. Know what you’re investing in

Warren Buffett refuses to invest in businesses he doesn’t understand. His reasoning is that you have to understand the business to know if a company is being run well. I agree with this thinking. I know nothing about banking, so now I don’t invest in banks. What I am passionate about is renewable energy. I understand the challenges and opportunities in that sector, which means I can make more informed decisions about the stocks I add to my portfolio. It can be frustrating missing out on big growth stocks, and Warren Buffett received a lot of criticism for not investing in Google (Alphabet) or Facebook. But he didn’t understand how they made money and didn’t want to take that risk.

However, he was one of the only big investors who bought Apple when it was undervalued and has since made $100bn from that investment.

2. Margin of safety

This is the most difficult step when choosing a stock. Warren Buffett only buys a company when it is undervalued, providing a ‘margin of safety’ in case it doesn’t go up by as much as he had hoped. To do this, Buffett waits for the price to go down before buying and continues to buy more as the price falls lower and lower. I found this very scary at first. But, if I’ve chosen a company well, this is how I’ll make the most profit in the long term.

3. Think long term

Warren Buffett is not a trader, he’s an investor. He buys stocks with the aim of holding them ‘forever’. That is where real wealth is built. Thinking long term may be the most important rule I’ve had to learn. It’s not exciting or flashy, and I won’t be rich tomorrow. But investing isn’t a get rich quick scheme, and planning for the long term is how I’ll continue to approach my portfolio. Buffett became a billionaire in his 50s, so I still have many years in which to catch up.

Conclusion

If there’s one theme in all of Buffett’s teachings, it’s patience. Warren Buffett once said that the stock market is a system for transferring wealth from the impatient to the patient. In my early days, I often grew over-excited watching a stock shoot up in value, and would buy in, hoping to make a quick profit. Reacting to the market like that cost me a lot of money. I’ve since learned to ignore the noise and plan for the long term, just like Warren Buffett.

The post 3 lessons I’ve learned from watching Warren Buffett appeared first on The Twelfth Magpie.

More reading

• Will I buy SpaceX at £100 a share in my SIPP?
• Aberdeen shares are back in the FTSE 100 — is this turnaround stock just getting started?
• Down 65% with a 5.65% yield! Is this dividend share a once-in-a-decade buy? 
• This is the worst FTSE 100 share over 5 years. Should I sell it?
• Microsoft’s share price is storming back and it’s not too late to consider buying

James Reynolds does not have a position in any of the shares mentioned. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Alphabet (C shares), Apple, and Facebook. The Motley Fool UK has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I went back to the first five FTSE 100 investment ideas I shared in my articles. The shares I had picked were Burberry, Unilever, Sage Group, Anglo American, and Smurfit Kappa. 

Portfolio vs FTSE 100 returns

If I had invested an equal amount in each of these FTSE 100 shares on the day the article was published, I’d show a total return of 26% on my portfolio (as of Friday 24 December). By itself, the return on portfolio sounds pretty plump to me. This is particularly so, considering the stock market crash earlier in the year and the continued pandemic. 

But I think the better way of assessing it is by comparing it to the FTSE 100 index’s performance. To do this, I first averaged the index value for each of the days that the stock purchase was (hypothetically) made between October and December 2018. 

I then calculated how much it has changed as per the latest close, which is on 24 December at the time of writing. There are other ways of coming up with a comparable estimate, but this was the most straightforward one, which also gives a good indication of where we are at. 

The results surprised me quite a bit, I have to say. Turns out that the FTSE 100 index has fallen on average by almost 7% in the two years. To put it in other words, the performance of this investment portfolio is 33 percentage points better than the index average. 

There’s more. 

Not all FTSE 100 stocks are made equal

As of the last close, every single FTSE 100 share in the portfolio showed a positive return by comparison. There are vast differences in the extent of gains, but at the very least the shares are headed in the right direction. 

The biggest gainer is the FTSE 100 packaging provider Smurfit Kappa, whose share price is up 76% from then. It’s followed by the multi-commodity miner, Anglo American, whose share price is up almost 45%. These two make up most of the gains. 

Others like Unilever, Sage Group, and Burberry have shown single-digit returns by comparison.

What to do next

I’d stay invested in them, however. All three companies have strong credentials. In fact, part of the reason their returns look relatively muted has to do with the timing of the calculations. One month later, for instance, things could look very different.

Now with the Brexit deal out of the way, I reckon there’s greater predictability about the UK’s future. With some more patience, I think these FTSE 100 stocks will also show great returns, like many others among FTSE 100 constituents. 

The post This is how much I would’ve made from my first 5 FTSE 100 stock ideas here appeared first on The Twelfth Magpie.

More reading

• Will I buy SpaceX at £100 a share in my SIPP?
• Aberdeen shares are back in the FTSE 100 — is this turnaround stock just getting started?
• Down 65% with a 5.65% yield! Is this dividend share a once-in-a-decade buy? 
• This is the worst FTSE 100 share over 5 years. Should I sell it?
• Microsoft’s share price is storming back and it’s not too late to consider buying

Manika Premsingh owns shares of Burberry. The Motley Fool UK has recommended Burberry, Sage Group, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Why the FTSE 100 index can push ahead

The odds are still strong. Two people have just been vaccinated against Covid-19 in the UK, which means that we are now indeed at the beginning of the end of the pandemic. Of course it’s entirely possible that the vaccine might not work, or have unexpected side effects, but I imagine that there’s a good chance that things will go right. 

The economy’s also doing alright. At the very least, it’s responding to the fiscal stimulus. I mean, just look at the real estate sector. Despite slow growth, house prices in the UK are at record levels. 

I’m even hopeful on a Brexit deal now. Just the day before yesterday I wrote an article saying that the FTSE 100 index can plunge to 5,000 if we have a no-deal Brexit. But by yesterday things turned around, somewhat. Prime Minister Boris Johnson announced the elimination of contentious clauses, according to a Financial Times report. This basically makes the possibility of a good Brexit deal stronger. 

To be fair there are contradictory reports on what’s really going on with regards to the Brexit deal. But if there’s reason for optimism, I’d go with that, like all other FTSE 100 investors seem to be doing. 

The FTSE 100 index is already close to 6,600 levels as I write. It has gained over 800 points since the beginning of November. To me it sounds entirely plausible that it can gain another 400–500 by the end of December. 

This is all very good. 

The big question now is — what should we as investors do about it? 

Investing in the bull run

I, for one, am in a mood to book (some) profits. As a result of the recent stock market rally, many of my stock market investments are showing pretty returns. I have no doubt that these quality FTSE 100 shares’ prices will rise even more in the coming years. But I also want to receive some rewards from my investments. One of these is JD Sports Fashion. 

The next step will be to re-invest these gains into good stocks that are still quite cheap. Some safe stocks, for instance, have seen share price softening as beaten down stocks’ prospects look better now that the Covid-19 vaccine has been developed. Ocado and Rentokil Initial are two such examples.

I’m also considering loading up on relatively high-risk shares like easyJet and IAG. I’m particularly encouraged since my EZJ buy turned green after months of what looked like a catastrophic meltdown. There are many others to consider that may well double my money soon enough. 

The post Can the FTSE 100 index push past 7,000 by the end of 2020? appeared first on The Twelfth Magpie.

More reading

• Will I buy SpaceX at £100 a share in my SIPP?
• Aberdeen shares are back in the FTSE 100 — is this turnaround stock just getting started?
• Down 65% with a 5.65% yield! Is this dividend share a once-in-a-decade buy? 
• This is the worst FTSE 100 share over 5 years. Should I sell it?
• Microsoft’s share price is storming back and it’s not too late to consider buying

Manika Premsingh owns shares of easyJet, JD Sports Fashion, Ocado Group, and Rentokil Initial. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The uncertainty of Brexit, the trade war between China and the US, weakness across European economies and civil unrest in countries across the world, are all factors clouding the outlook for economists and companies.

With uncertainty growing, here are the three moves I’m making right now in these weak stock markets to position my portfolio for further instability.

Focus on quality

The first move I’ve been making over the past 12 months is shifting my investments away from domestic small-cap stocks into internationally diversified blue-chips.

I’ve been doing this because, while it’s difficult to tell what the future holds the UK economy, I’m pretty confident that over the next five or 10 years, the global economy will only continue to grow.

One strategy I’ve been using as part of this shift is investing in international income funds, which own baskets of both UK and global income stocks. I reckon these holdings should allow me to ride out any volatility at home while still benefiting from growth overseas.

Fixed income

As well as moving away from small companies in my portfolio, I’ve also been buying some fixed income. As a long term investment, bonds tend to underperform equities, so they’re not really the best instrument to use if you have a 10- or 20-year investment horizon.

That said, bonds can provide a degree of stability in an uncertain environment, and bond prices tend to move inversely to equities. In other words, bond prices tend to rise when stock prices fall.

I’m hoping that if there’s a sudden market crash, bond holdings will go up in value. And I can sell them at a profit to take advantage of falling stock prices and buy high-quality stocks at reduced prices.

Cash is king

Bonds are an excellent way to reduce volatility in your portfolio, but cash is, without a doubt, the safest asset class there is. It’s always best to have enough cash on hand to cover living expenses for at least six months. That way you don’t have to worry about digging into your portfolio to raise money for day-to-day spending.

It’s particularly important to make sure you have enough cash on hand to cover any unforeseen expenses in weak stock markets. You don’t want to have to sell your shares to fund day-to-day spending after a sudden market decline, as you could be forcing losses on yourself.

Having enough cash on hand can help you ride out the volatility and keep a long term mindset in uncertain markets.

The bottom line

Trying to predict what the stock market will do in the short-term is virtually impossible, so it’s best not to try. Instead, a better strategy is to build your portfolio with a long term mindset by owning high-quality blue-chip stocks and keeping cash on hand to cover any unforeseen expenses. These factors become even more critical in weak stock markets.

The post 3 moves I’d make right now in these weak stock markets appeared first on The Twelfth Magpie.

More reading

• Will I buy SpaceX at £100 a share in my SIPP?
• Aberdeen shares are back in the FTSE 100 — is this turnaround stock just getting started?
• Down 65% with a 5.65% yield! Is this dividend share a once-in-a-decade buy? 
• This is the worst FTSE 100 share over 5 years. Should I sell it?
• Microsoft’s share price is storming back and it’s not too late to consider buying

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, what these success stories don’t tell you is how many people have also lost everything with forex trading.

High risk, high reward

Forex is the largest financial market in the world. Every single day, more than $5trn of foreign currency is bought and sold, mostly in London. To amplify profits, traders often make use of leverage. Some platforms used to offer leverage ratios of as much as 500x the initial investment. This means a trader with no experience and just £100 could buy and sell up to £50,000 of foreign currency.

The problem with leverage is that while it amplifies gains, it also amplifies losses. This is why so many traders end up losing everything. The forex website DailyFX found that a staggering 96% of forex trading accounts end up getting wiped out.

This ratio implies you might have more chances at the roulette tables. With just a 4% chance of becoming a winning forex trader, playing the foreign currency markets is, in my opinion, akin to gambling. As a result, I think you have a better chance of making a million by investing your hard-earned money instead.

Investing for the future

Investing in high-quality blue-chip stocks and playing the foreign exchange market are two very different things. For one, blue-chip stocks usually offer a dividend yield, whereas you typically have to pay to borrow money with forex trading. Further, based on the assumption that 96% of forex traders lose money, all you would need to do to beat this record is to buy a high-yielding blue-chip stock, like Aviva (current yield of 9%), and hold it for 12 months.

Assuming Aviva’s share price didn’t decline substantially over the year, the chances of you coming out with a positive return are almost guaranteed.

Tracking the market

If you don’t fancy picking stocks, you could always invest in a low-cost FTSE 100 tracker fund. Over the past decade, the FTSE 100 has produced an average annual return for investors of around 7%, turning every £1,000 invested into roughly £2,000. This trend is likely to continue as long as the global economy continues to expand.

And you don’t need to get up early every day and trade for hours to realise these profits. All you need to do is click ‘buy’, sit back, and relax.

Power of compound interest

Thanks to the power of compounding, the returns of this approach really add up over time. A £1,000 lump sum invested in the FTSE 100, growing at 7% per annum for 10 years with an additional £100 contribution every month would, according to my calculations, be worth more than £19,000 at the end of a decade. If you invest £550 a month for 35 years, at a 7% rate of return, you could build a savings pot of just under £1m.

It might take some time to reach this level, but the chances are you would never see the same kind of returns from a forex trading.

The post Don’t gamble with forex trading. I’d aim for a million like this appeared first on The Twelfth Magpie.

More reading

• Will I buy SpaceX at £100 a share in my SIPP?
• Aberdeen shares are back in the FTSE 100 — is this turnaround stock just getting started?
• Down 65% with a 5.65% yield! Is this dividend share a once-in-a-decade buy? 
• This is the worst FTSE 100 share over 5 years. Should I sell it?
• Microsoft’s share price is storming back and it’s not too late to consider buying

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Most of us should be putting something extra away for our retirements, too. But whenever I tell people that I reckon a stocks & shares ISA is by far the best place to invest, they’re often too afraid of the possibility of even short-term losses.

But if you still have decades to go until retirement, you shouldn’t be afraid of the ups and downs of share prices. In fact, you should welcome them. 

My preferred retirement investing strategy is very simple. Put your cash in a stocks & shares ISA and buy dividend-paying FTSE 100 stocks. Then reinvest the dividends into more of the same kind of stocks. That’s it.

Welcome wobbles

How does volatility help? If you are buying things rather than selling them, you’ll get more for the same money when they’re cheaper, of course. That’s obvious to people snapping up twofers at the supermarket, but as soon as they buy shares, they’re only happy if they go up… even though they will want to buy more next month, or next year, or whenever.

Some people advocate buying in the dips, but timing the market is notoriously difficult. I say just make each investment as soon as you’ve built up enough for a purchase, and the movements of the market will do the rest for you.

How it works

Over the long term, the market will almost certainly rise. If it goes up in a simple straight line, every time you make a new investment you’ll get slightly fewer shares for the same money.

But as it will actually zig-zag to some extent, you’ll get more shares when the market is below its straight line path, and fewer when it’s above. 

And that means your average buying price will be lower than if the market had followed a straight line.

For example, suppose you make four investments of £1,000 over time, at 100p, 105p, 110p, and 115p per share in a steadily rising market. You’ll buy a total of 3,731 shares.

But if the prices go through 100p, 90p (15p lower that above), 125p (15p higher) and 115p, you’ll actually end up with 3,780 shares — 49 more shares — even though the price ended up the same in both cases, and the volatility was equally split up and down. The volatility itself got you more.

Can you do even better?

It’s an effect known as “pound cost averaging”, and some people go as far as to try improving it by deliberately holding back investment cash and spreading out their purchases over time.

But there’s a good reason not to do that — shares go up more often than they go down.

So delaying is more likely to result in you facing more rather than less expensive shares than today. The benefit of averaging caused by volatility is there, but it’s outweighed by the benefit of getting your cash into the market earlier.

Hopefully, you can now see that volatility is your friend. But what actual shares should you buy?

The post Here’s a Footsie ISA investment strategy that could lead you to a happy retirement appeared first on The Twelfth Magpie.

More reading

• Will I buy SpaceX at £100 a share in my SIPP?
• Aberdeen shares are back in the FTSE 100 — is this turnaround stock just getting started?
• Down 65% with a 5.65% yield! Is this dividend share a once-in-a-decade buy? 
• This is the worst FTSE 100 share over 5 years. Should I sell it?
• Microsoft’s share price is storming back and it’s not too late to consider buying

Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Make the most out of your allowance

The government sets a limit on the amount that you can invest in ISAs each year, and for the current tax year, there’s a maximum subscription allowance of £20,000. You can divide this in any way across a simple cash ISA or one through which you by shares, as well as the Lifetime ISA (maximum of £4,000) and an Innovative Finance ISA, provided you stay within the combined annual limit. You cannot carry forward any of the allowance to future years, so any unused allowance in a tax year will be lost forever.

Investing with a lump sum at the start of the tax year enables you to be fully invested as early as possible, which gives you the greatest potential for growth. But by regularly investing, you have the opportunity to spread your risk. The effect of regular investing is that you will be buying assets at different prices on a regular basis, say monthly, rather than just once. This enables you to smooth out volatile price movements — and with automatic regular investments, it can also make it easier for you to stick to your investment plan.

Choosing the right ISA provider

Choosing an ISA provider can be more complicated than it sounds. The right provider can open up a wider range of investment opportunities, whereas others may restrict your options.

And what may be the right choice for someone else may not be best for your investment needs. You should consider what you actually want to trade, how much financial advice you require and whether or not you are happy to place trades online.

It’s also important not to overlook the costs of trading. Account fees and dealing commissions can add up much more quickly than you think, and it can have a big impact on returns through the effects of compounding. Keeping this in mind, it’s also a good idea to keep your portfolio turnover as low as possible.

Picking the right investments

With a wide range of investment options available for a stocks and shares ISA, deciding what to buy can be daunting for both new and experienced investors.

You could invest directly in stocks. Or you can buy an actively managed fund, which can give you instant diversification from a single investment. You also get a professional fund manager, who makes all the key investment decisions on behalf of investors, meaning you won’t need to worry about spending time researching companies yourself. Individual investors tend to go for unit trusts or open-ended investment companies (OEICs), but investment trusts are also worth considering.

Another option would be to invest in exchange-traded funds (ETFs) that track popular stock indices, such as the FTSE 100 or the S&P 500. Investing in ETFs can be a very low cost way to access the performance of an index, with some offering ongoing charges of as low as 0.07%.

The post 3 tips to get the most out of your stocks and shares ISA appeared first on The Twelfth Magpie.

More reading

• Will I buy SpaceX at £100 a share in my SIPP?
• Aberdeen shares are back in the FTSE 100 — is this turnaround stock just getting started?
• Down 65% with a 5.65% yield! Is this dividend share a once-in-a-decade buy? 
• This is the worst FTSE 100 share over 5 years. Should I sell it?
• Microsoft’s share price is storming back and it’s not too late to consider buying

Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

When you think about it, investing is actually wonderfully simple: find a bunch of great companies that are likely to keep increasing their revenues and profits going forward. Buy a slice of each. If they offer the prospect of a solid dividend stream, even better. Receive, re-invest, repeat. Then hold for the long term. 

The only problem, however, is that great companies don’t always make for great investments. Confused? Let me explain.

Do your shares do this?

Investing in a business only makes sense if you believe it will outperform the market over a specific period of time. According to former Old Mutual fund manager Ashton Bradbury — one of 64contributors to Harriman’s New Book of Investing Rules — this outperformance will come from at least one of the following:

• The company will grow profits faster than the market for a long period.
• The company is about to be positively re-rated by the market.
• The company is likely to deliver a positive surprise to the market in the future, perhaps by reporting higher than expected profits.

Look at your portfolio. Does each of your stocks satisfy one or more of the above? If so, you stand a decent chance of making good money. If not, you’re increasing your risk unnecessarily by owning them. This matters a lot, particularly when markets are already looking rather expensive.

According to Bradbury, it doesn’t matter if your company possesses an enviable portfolio of brands, huge market share and/or massive geographical reach — qualities that even those who don’t invest would probably regard as characteristics of a great company. If it isn’t likely to outperform, it’s probably not worth owning. Investors would be better served, he suggests, by moving their capital into an index tracker.

It’s a convincing argument. In addition to their low charges, index trackers (and exchange-traded funds) give investors immediate diversification, thus eliminating stock-specific risk. The value of a portfolio could still fall, of course, but not to the same extent as one concentrated in only a small number of holdings. Thanks to spreading their cash among hundreds/thousands of stocks, those choosing the former would never suffer the falls recently experienced by holders of funeral services provider Dignity, floor coverings and beds retailer Carpetright or, dare I say it, Carillion. On top of this, passive investments pay dividends that do not depend on the health or performance of any one company.

This is not to say that attempting to build a portfolio of the best companies you can find is a waste of time as we’re huge fans of stock picking at the Fool. That said, it’s important to remember that your work as an investor has only just begun when you make a purchase. The investment should then be reviewed at regular intervals to ascertain whether outperformance is still likely. Has the true value of a company now been recognised by the market? If so, why retain its shares? Can a highly rated stock continue to surprise or is profit growth now likely to slow?

So as we enter another week in the markets, begin questioning whether the stocks you already own or intend to buy will really beat the benchmark. If not, your money could probably be put to better use elsewhere.

The post One big reason to AVOID great companies appeared first on The Twelfth Magpie.

More reading

• Will I buy SpaceX at £100 a share in my SIPP?
• Aberdeen shares are back in the FTSE 100 — is this turnaround stock just getting started?
• Down 65% with a 5.65% yield! Is this dividend share a once-in-a-decade buy? 
• This is the worst FTSE 100 share over 5 years. Should I sell it?
• Microsoft’s share price is storming back and it’s not too late to consider buying

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Legendary US super-investor Warren Buffett is certain that most investors would be best off choosing a low-cost index-tracking fund. By definition, you should then more or less match the overall return from the market, at the same time side-stepping the transaction costs associated with individual stock trading and the management fees charged by fund managers.

On the London stock exchange, you might go for a tracker fund that follows the FTSE 100 index or the FTSE 250 index, for example, and one candidate is the Vanguard FTSE 100 ETF. However, several options exist to put your money into a collective investment vehicle, including Exchange-traded Funds (ETFs), Investment Trusts and Mutual Funds. My Foolish writing colleague Edward Sheldon penned an article describing these options recently.

Where to begin with individual stocks

A time probably comes to most investors when they feel like individual stock picking. My own investing journey started with privatisation shares in the 80s and 90s, then I bought a fund that tracks the FTSE 100 and finally moved on to individual stocks on the London Stock Exchange. When you are ready to pick your own stocks, it makes sense to start by targeting firms that have large and relatively stable underlying businesses compared to companies with smaller market capitalisations.

The stocks of large firms tend to have good liquidity, which means you can get in and out of the shares without difficulty and without excessive transaction costs. Plus the movements in the share prices of large firms tend to be slower than smaller ones, which can give you time to react with buy and sell decisions as the fundamentals of the underlying businesses change. So a good place to begin with individual stock picking is FTSE 100 Index businesses, but those companies come in various categories that tend to behave in their own unique ways.

Know the beast you’re trying to ride

It pays to be clear about what you may be getting into and I think a reasonable place to start is by dividing the stocks in the FTSE 100 into the categories of Defensives, Cyclicals and Growth. If you see a business with strong and stable cash flows supported by products and services that experience high demand whatever the economic weather, you are probably looking at a Defensive. Names to look for include Unilever, GlaxoSmithKline and Diageo.

The cyclicals tend to have underlying businesses that ebb and flow along with economic cycles. Their profits and share prices are as likely to plunge as to soar over an extended period. Examples include Lloyds Banking Group, BP and Ferguson. Finally, successful growth companies often make it to the FTSE 100 and can keep on growing. Think of Just Eat, Smurfit Kappa Group and Sage.

Stock-picking can be exciting, and ace fund manager Neil Woodford is currently investing on the theory that UK-facing cyclicals look undervalued and should do well. Meanwhile, the FTSE 100 is weighted towards cyclical firms, so maybe a FTSE 100 tracking fund is all you need after all, especially considering the theory going around that stocks in general have spent the past 20 years or so setting up, in terms of technical analysis, for a multi-year bull run.

The post How to invest your first £5,000 appeared first on The Twelfth Magpie.

More reading

• Will I buy SpaceX at £100 a share in my SIPP?
• Aberdeen shares are back in the FTSE 100 — is this turnaround stock just getting started?
• Down 65% with a 5.65% yield! Is this dividend share a once-in-a-decade buy? 
• This is the worst FTSE 100 share over 5 years. Should I sell it?
• Microsoft’s share price is storming back and it’s not too late to consider buying

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. The Motley Fool UK has recommended BP, Diageo, Just Eat, Lloyds Banking Group, and Sage Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

With that in mind, what changes, if any, should we make to our investing strategy as the index enters uncharted territory? 

In my opinion, now is the perfect time to get back to basics, including safeguarding your life outside of the markets. Now could be the perfect time to build up that emergency fund you’ve always known you should have, just in case life throws up any unexpected costs. 

In the unlikely event of a market crash, or a far more likely correction, you don’t want to be a forced seller just because you got greedy while the going was good. 

In fact, I’d be tempted to go a little further and build up some dry powder in the brokerage account too – I’m thinking 15%-20%. That might sound overly bearish, but research shows that markets pull back on a surprisingly regular basis before eventually climbing to new highs. Having a little cash on the side might be the difference between snapping up that share that always seemed a little too expensive and lamenting the loss of a bargain. 

I’d also suggest investors reappraise their current holdings. Given that some valuations are indeed looking generous, now could be the perfect time to rid your portfolio of any positions you don’t have solid beleief in. As Warren Buffett advises: “Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.”

Believe in your purchases

I truly believe the best way to navigate new stock market highs is to stick to a long-term buy-and-hold approach. If you believe a company will be worth far more in 10 years than it is today, you wont feel the need to bank gains when it looks slightly overvalued. It’ll also make dealing with those calamitous 50% collapses easier, which you will experience at some point over your stock picking career if you do it long enough, even though they are thankfully rather rare. 

In summary, there’s nothing wrong with taking a little risk off the table in these conditions, especially if the resulting cash reserves facilitate a high-conviction buy once valuations seem more appealing. 

If you have a lot of capital to invest, however, there’s no point sitting on the sidelines.

If you’re finding valuations a little nervy, I’d advise the tried-and-tested strategy of pound-cost-averaging into a tracker fund over time by investing a fixed amount at regular intervals (say, once a quarter) regardless of what the market is doing. 

If you’re still interested in stock-picking then I suggest you maintain exacting standards from both valuations and business models. Buffett recommends investing as if you only have a limited amount of buys left in your investing career and that’s particularly sound advice in the current market. He says: “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches – representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.”

The post How to navigate the FTSE 100 near all-time highs appeared first on The Twelfth Magpie.

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