Here are just three of the latter I like to keep in mind. 

1. Nothing lasts forever

Without wishing to get your week off to a bad start, it’s worth remembering that everything we know is always in a state of flux and nothing is permanent. This is particularly true in the stock market.

Now, bar the odd wobble, markets have only gone in one direction since the financial crisis. They might continue going higher for a while. 

At some point, however, everything succumbs to gravity. We might not know what the cause will be (or when it will happen) but this is not as important as recognising that corrections and bear markets are to be expected not feared.

It’s also why, if you’re a passive investor, it can make sense to invest the same amount of money on a regular basis rather than all in one go.  

Gravity applies to individual companies as well. That wonderful growth stock that just simply won’t stop going up in price? It’ll come unstuck, even if only temporarily.

This might happen even if profits continue rising and simply because the weight of expectation has become too great. It’s the equivalent of scoring an ‘A’ in an exam when a teacher or parent was expecting an ‘A*’.

Sounds harsh? Thankfully, there’s a flip side to all this.  

2. The market has a habit of over-reacting

The fact that the good times won’t last forever also applies to bad times. And when the proverbial hits the fan, that’s usually the time we should be buying stocks.

Unsurprisingly, market participants have a habit of getting rather het up when prices drop. Research in the field of behavioural economics shows that losses feel far more painful than gains feel good. 

In time,  things recover. When there is no one left to sell, no stock gets sold. Cue buyers. Cue a rise in prices. It’s all down to something called ‘regression to the mean‘ or the tendency for things to even out over time.

The market may have trouble seeing this in the short term, but after a while — and by ‘a while’ I’m talking months, sometimes years — things will revert back to their true value. 

3. If everyone agrees with you, do the opposite

We’re social animals. We like it when people agree with us or praise things we’ve done. That’s all fine unless we’re talking about the stock market.

Buying stocks that everyone loves feels good. Buying stocks everyone wouldn’t touch with a barge pole? That’s not quite so comfortable but it can be far more lucrative. 

An established finding in investing has shown that the cheapest shares (those that the market is either uninterested in or hates) collectively give better returns than those with lofty prices over the long term. 

As to be expected, however, achieving this outperformance requires a whole lot of patience on the part of the individual.

That’s in short supply, of course, and that’s why being a contrarian can work wonders for your wealth. 

The post 3 investment rules I live by appeared first on The Twelfth Magpie.

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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.

As these examples show, checklists aren’t just for beginners. That’s true in investment as well. Many of the world’s most successful investors won’t consider buying a stock unless it passes a set of checks.

Today I want to share with you three simple tests you can do before you buy any shares in 2019. I believe that following these steps should help you avoid big losses and increase your chance of beating the market over long periods.

1. Dividends

As a general rule, I won’t buy shares that don’t pay a dividend. There are two main reasons for this. The first is that I think dividends are a good indicator of management discipline and of how much spare cash the company is generating.

Another advantage is that reinvested dividends can give a big boost to your returns. A 4% dividend yield reinvested over 10 years will add 48% to your original investment, on top of any capital gains.

The biggest risk with dividends is that they can be cut. The simplest way to test whether a dividend is affordable is to compare it with earnings per share. I usually look for earnings per share that are at least 50% higher than the dividend per share, preferably more. 

2. Growth

Even if you’re looking for good value income stocks, I think it’s important to look for companies that are growing.

As a rule of thumb, I would avoid companies with falling sales or profits. I’d aim to invest in companies where sales and profits are rising ahead of inflation. If a company isn’t growing, then quite often its value will gradually fall, along with its share price.

3. Spare cash

Free cash flow may sound technical, but it’s not really. It’s the money left over each year after a company has met all of its obligations. These include all operating costs, tax and interest payments.

This surplus cash can be used for investment in new growth opportunities, for debt repayments, or for dividends.

Most investors agree that the best dividends are those which are covered by a company’s free cash flow. This is because they are affordable without using debt or previous savings.

Bonus tip: Debt

Perhaps the simplest way to stay out of trouble on the stock market is to avoid companies with too much debt. The reason for this is that when a heavily-indebted company runs into problems, shareholders always lose out. That’s because debt is ‘senior’ to equity — lenders must be repaid before shareholders get anything.

A rule of thumb I use for my own investments is to avoid any company whose net debt is more than four times its annual profits. This isn’t appropriate for all businesses, but if your focus is on profitable, growing and dividend-paying stocks, I think this should be a useful guideline.

A sure thing?

This simple checklist won’t guarantee that you pick winners.

But I think it should reduce the number of losers in your portfolio. And that’s one of the biggest secrets of successful investing — if you avoid big losses, then your profits should take care of themselves.

The post Why I believe these 3 tips could boost your investment income in 2019 appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

If the answer to these question is yes, then you’re in good company.

40% of mothers who took part in a recent Mumsnet survey, commissioned by Legal & General Investment Management, said that they want to invest their money, but can’t. Some said they didn’t have enough spare cash, while some said that they just didn’t know how to get started.

I think that one reason for this could be that stock market investing has a bad reputation. Many people I speak to believe that it’s difficult and expensive.

The good news is that this doesn’t need to be true. Today, I want to explain how you could get started with stock market investing. I’ll also show how you could turn £10 per month into a £5,000 nest egg.

Secret #1

In the Mumsnet survey I mentioned at the start of this piece, 37% of those questioned said they’d consider investing “if they could grow their money over the long term.”

The good news is that over long periods, the stock market has historically delivered much higher returns than cash savings. According to figures prepared by Barclays, the average annual return from the UK stock market from 1899 to 2016 was 8.9%. For cash, the equivalent figure was just 4.7%.

Of course, over short periods, the stock market can go up and down quite unpredictably. But it seems that over the long term, stocks generally go up.

Making your money work for you

The second ‘secret’ I want to share with you is called compounding. What this means is doing nothing and letting your money work hard for you.

For example, if you received interest of 4% on an investment of £100, you’d have £104 after one year. If you left this for a second year, you’d end up with £108.16. This is because you’d receive interest on the full £104, not just your original £100.

If you continued to leave the money untouched, then after 10 years you would have received £48 of interest. Your initial investment of £100 would now be earning nearly 6% per year for you. This is the power of compounding.

The magic of regular savings

Compounding is a wonderful way to make money. But the effects are even better if you can add money regularly to your savings.

My sums show that if you saved £10 per month into a tax-free Stocks & Shares ISA account for 10 years at a return of 7%, then you’d end up with £1,720. If you carried on for 20 years, you’d have £5,104.

How can I do this?

Hold on a moment. You don’t know anything about the stock market or how to buy shares? How can you hope to achieve the kind of results I’m talking about?

Most top investors agree that the safest and most reliable way to invest in the stock market is to put your money in a tracker fund. This is a low-cost fund that simply follows the movements of the wider stock market.

In the UK, the most popular choice is a FTSE 100 tracker fund, which follows the largest 100 companies on the London Stock Exchange. Many of these companies pay generous ‘dividend’ or interest payments, providing regular annual returns.

The post Why 40% of mums need to know this investing secret appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.