Successful investors are deemed successful from their collective gain in their portfolio over time. It may seem that there are no common factors between investors due to the differing methods in which individual investors attain their success: some investors attain growth in the portfolio by investing in high risk shares and using active trading to get these gains. Other investors attain this growth by investing in a diversified portfolio of shares in the market and employing a more passive strategy.
However, there are common factors among all these investors: they employ consistency in whatever they do. The employment of one strategy/principles implies consistency and continuous employment of principles across other areas. In this piece we will take a look at how exactly investors can employ these strategies to achieve the most from their portfolios. This is applicable both for local investors as well as those involved in international share trading.
Consistency in Strategy
Consistency in strategy implies sticking to one strategy and seeing it through. This only applies to investors who are fully in charge of their portfolio i.e. they can fairly easily control the purchase and sale of assets within their portfolio. For example, an investor may be applying a value stock investing strategy, in which he purchases a stock at a market price he perceives to have a lower value than the intrinsic value of the stock as indicated by the stock’s fundamentals. The investor may be tempted to in a stock that is doing well but would be suitable for an investor employing a growth stock investing strategy.
Consistency in Principles
This involves setting clear rules for when to purchase a stock and when to sell it. Some investors are quite loss averse to the detriment of their portfolio. Take for example a stock for which an investor sets a loss limit of 10%. This same stock has recently done well due to the company’s earnings or some other market factor. If the stock price were to come down and by 8%, a disciplined investor would begin set a sell price for their stock. However, there are some investors who would hold on the stock believing it to be a ‘phase’ of the market. Disciplined investing requires setting strict principles and guidelines by which an investor must act.
Diversification
This is probably the most popular term used in investing. The phrase ‘don’t put all your eggs in one basket’ comes to mind here. But it’s not just about diversifying itself, how you do it matters as well. There is no perfect way to diversify one’s portfolio, and this is because diversification is a balance of risking one’s returns for the sake of minimizing one’s losses when the market is not in one’s favour. The most typical example of a diversifying one’s portfolio is purchasing government bonds and treasury bills to diversify their portfolio. The return on bonds and t – bills is typically much lower than returns on equities. What happens then is that the investor misses out on the potential returns they could have gotten from their equities for the sake of minimizing losses in the case where their equities’ share prices go down.
Thinking long term
Equities are generally a long – term investment and is the reason investors typically employ value strategies or growth strategies in their investing. This is why traders suggest more passive trading strategies over active trading strategies. Studies indicate that active trading has no significant advantage over passive trading due to transaction costs. This is because most stock markets are semi – efficient or efficient meaning that changes in the market are reflected in prices of assets immediately or almost immediately through the economic forces of supply and demand.
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