Every investor needs a plan. It might be as simple as 'buy undervalued shares with good prospects' or 'do my own research on shares that I read about on fool.com.au', but you should have one.
Generally speaking, all investors should want three things:
1. To earn a return on their investment
At a minimum you should be beating the average interest rate on your savings account, as the higher returns compensate you for the higher risk and time demands of investing in the ASX.
The best investors are Foolish ones, who buy high-performance companies at reasonable valuations and enjoy consistent market-beating returns and growing dividends. Coca Cola Amatil Ltd (ASX: CCL) is a perfect example of a company with long-term prospects trading at an attractive valuation. Recent earnings downgrades have destroyed the company's share price, although buyers can still expect a dividend better than a savings account with the added sweetener of a share price recovery and earnings growth in coming years.
2. To buy and hold for a long period of time
Warren Buffett is famously quoted as saying he buys shares on the assumption that the market will close tomorrow and reopen in ten years. Ten years may be hard to imagine, but if you've picked your shares carefully you can enjoy outstanding returns during that time as well as passive income for very little effort. Investors in Woolworths Limited (ASX: WOW) have enjoyed returns of over 200% in the last ten years, while those who bought Beach Energy Limited (ASX: BPT) have enjoyed returns of nearly 600% during that time.
Beach Energy is an excellent purchase for the long-term investor with its sizeable tenements, growing production, great cash position and lack of debt. Buyers also enjoy the security of knowing that oil and gas are increasing in demand while supply is inexorably shrinking.
3. To not lose money
This one seems pretty obvious, but is easier to say than do. Owners of Coca Cola at its previous price of $15 will be pretty unhappy with their purchase, while those who buy at the current price of ~$9.60 are significantly less likely to experience share price drops. Buying shares after they have fallen and stabilised reduces the likelihood that they will fall again – you just need to make sure there are good prospects for recovery!
You can help the cause by buying 'defensive' stocks that operate in essential industries like healthcare or groceries, as these are the last areas to experience earning declines in tough times. People will always spend money on healthcare and food. Other great ideas can be found in infrastructure stocks like Sydney Airport Holdings Ltd (ASX: SYD) and Auckland International Airport Ltd (ASX: AIA) who enjoy a captive market and good growth prospects.
In addition to the fiscal rewards, Foolish investors enjoy a continuous stream of share ideas from fool.com.au and great ideas in weekly investment updates. Check out our free report for The Motley Fool's latest great stock idea – with record profits and a growing dividend, it could be the crown jewel of your perfect portfolio:
