Wealth Building Through Investment
Filed under Wealth Management
With the interest rates on offer from banks pitifully low, more people than ever are considering investing their money in a bid to protect themselves from the impact of inflation.
However, picking the right investment opportunity can be a minefield, with as many scams or inflated claims as there are genuine offers. But with some careful research it is possible to find a handful of strategies which have in the past proven successful and might be worth considering as a vehicle for your cash.
Investment usually requires a longer-term commitment than a simple savings account and this is most definitely the case for value stocks. Although they have a bad name, by choosing the right kind of companies it is possible to snap up shares at undervalued prices and ride the wave of investment as the stock climbs back up in value.
Recent examples of value stocks which have bounced back include IBM and Coca Cola. One study of value stocks between 1968 and 2000 showed an average growth rate of 11%, compared to just 6.5% on one of the biggest US indices, the S&P 500.
However, it is essential not to simply select any cheap stock. The company must have strong competitive potential in its field, a solid financial base and be undervalued by at least a third.
Small-cap stocks are an alternative to value stocks and have consistently outperformed their larger-cap cousins in studies. On average, smaller caps have beaten large caps by 25 basis points every month, over an 85-year period.
But to make a profit, it would not be sufficient to simply pick a stock at random. It must have the same solid features seen in a value stock, without the depreciation in price.
A similar technique to value investing is buying contrarian stocks. These are shares which are not fashionable and are at a low price not because of the company`s own performance, but due to market sentiment. This is where the strategy differs from value stocks. Although the principle is similar between the two approaches – buy low, sell high – the cause for the stocks being out of favour varies significantly.
By steering clear of stocks which are the latest trend, investors can avoid hefty downward swings when sentiment switches course. A stock which has only fallen on the basis of opinion will eventually rise in value, providing the underlying business is robust.
But building wealth is not just about which stocks you pick or what market you choose to trade in, it is also about size. And piling too much of your money into one investment is one of the worst ideas possible.
Some investors fall in love with a company and want to support it, or possibly believe they have spotted an opportunity others have missed. Whatever the reason, it is very easy to overload an asset with too much of your available capital – a risky ploy which could see you losing everything if the business collapses.
Experts recommend that no more than 3% is invested into any single stock. If your approach is cautious, invest less. If you favour an aggressive strategy, increase it slightly but not too much.
Finally, while stocks and shares are the investment of choice for many people, there are many other options to consider. Foreign currency trading, or forex as it is often known, is a market which is rapidly increasing in popularity among novice traders due to its ability to turn a profit even in the midst of a recession.
However, forex trading is not for the faint hearted as it is possible to lose money as well as make a profit. It will only suit those willing to take more of a risk. If you decide it could be for you, it is worth seeking the advice of an expert before proceeding.