If you are determined to be a better investor in 2014, what should you resolve to do now? Photo: Peter Braig
New year resolutions are normally aimed at making us healthier or less selfish. But we want to help you become richer. If you are determined to be a better investor in 2014, what should you resolve to do now?
1. Don't get fixated on "buying opportunities" When markets are having a good run, investors can become fixated with the wait for a buying opportunity, so they delay buying. But if the market rises by 10 per cent while you're waiting for it to fall back by 5 per cent, you've missed out. When the market is strong, look for stocks or sectors that have been left behind. If you prefer to use funds you can "drip feed" your money in – if the sought-after sell-off does occur you'll still benefit, but the important thing is to get in eventually.
2. Beware of apparent "bargains" When a major market shakeout occurs, striking bargains can emerge. But in a strong market, stocks are unlikely to be "obviously cheap". Shares with a high dividend yield should be treated as a warning rather than a temptation. The market is not expecting those companies to grow make – sure you have sound reasons if you think you know better.
3. Look forwards not backwards Once you've made an investment, only the taxman should care what the purchase price was. You need only to ask yourself: does the stock look good value now? If it does you keep it, if not you ditch it. Gains are wasted by investors booking profits too early or deepening their losses in the hope of getting back to their purchase price. Will you make any investment resolutions this new year?
4. Don't drop your guard in a bull market One good habit is to remember that famous stockbrokers' adage: "Never confuse brains with a bull market". When everything goes up, it is very easy to convince yourself that you're the next Warren Buffett. However, the importance of good quality research never goes away. After all, to quote the Sage of Omaha himself: "You only find out who is swimming naked when the tide goes out."
5. Save more, start early Life expectancy is likely to continue to rise, so our retirement pots will need to last longer than ever before. And consider this: $100 saved at the age of 40 generating a 5 per cent return would be worth $338 by your 65th birthday. Leave saving until 50 and it would be worth only $207. That's the power of compound interest. Even modest amounts put away early can build into sizeable sums given enough time.
6. Don't, through emotional attachment, cling on to shares that keep going down Owning a share is an investment, not a love affair. Selling an underperforming investment is often cathartic – it is such a relief not to have to look at its valuation any more.
7. Watch what companies do, not what their managers say Make sure their interests are aligned with yours. Managers love to talk about growing the firm by acquiring other businesses. But this can destroy value, with bosses taking their eyes off the day-to-day operations, which are what really create value for shareholders.
8. Act quickly on your hunches Gut reaction is often right in the stock market. For example, when the finance director resigns at a small company, sell the shares immediately, as he is usually in control of the real financial information and he may have spotted something dangerous to his career (poor performance or worse).
9. Review target prices for stock market indices and individual shares It is very important when holding international investments to see whether the index you are exposed to is expensive relative to other regions that you could invest in, particularly with regard to expected growth in profits. Target prices for shares should be looked at to see whether the projected earnings are believable, if a valuation relative to comparable companies is too high, or whether you should be topping up the holding. It is always easier and often better to buy more of what you already own, as you have already done the research and are monitoring the news rather than entering the murky waters of a new holding.
10. Don't fixate on fees Try not to be overdriven by the charges on your investments to the detriment of the investments themselves.
11. Talk about money with your family Those with considerable wealth could talk about managing money so that those who will inherit will understand and be more comfortable with what can be a considerable burden. Others will need to talk as a family about what might happen in the future and where the resources might come from.
12. Don't expect investment returns to be smooth Nothing goes up in a straight line forever. Anyone who buys Bitcoins or capital city property, for example, should bear this in mind.
Daily Telegraph, London