It’s not as hard as it seems. If only investing were easy. If only it could bring me the joy of making money with the minimum of stress. In other words, if only I could be a happy investor. Unfortunately, over the past few years happiness for many investors has been in desperately short supply. Investors have had a stressful time, to put it mildly. We had the dotcom crash of 2001-2002, a recovery, and then the banking crash of 2008, followed by more recoveries, and then more crashes. Shares have been going up and down like yo-yos. A global…
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It’s not as hard as it seems.
If only investing were easy. If only it could bring me the joy of making money with the minimum of stress. In other words, if only I could be a happy investor.
Unfortunately, over the past few years happiness for many investors has been in desperately short supply. Investors have had a stressful time, to put it mildly. We had the dotcom crash of 2001-2002, a recovery, and then the banking crash of 2008, followed by more recoveries, and then more crashes. Shares have been going up and down like yo-yos.
A global loss of faith in shares
Sometimes, with such a poor performance from shares, it takes a leap of faith to continue investing. Many will ask: is it worth all the effort and the stress? Are we playing a game where the odds are stacked against us?
These are questions that many have asked. It’s the reason why interest in buying shares around the world, is at such a low ebb. It’s why so much money is sitting in bank and building society accounts paying derisory rates of interest. There is a global loss of faith in shares.
Here’s how you can reduce the stress
Yet there is a way to reduce the stress. There really is, I think, a way to be a happy investor. It’s called high-yield, or dividend, investing. This is what I have built my investing strategy around.
What’s more, this style of investing is a method that has been used to stunning effect by one of the world’s greatest investors. You can learn more about him and the shares he has backed in the report “8 Shares Held By Britain’s Super Investor“, available to you completely free.
So, what do you do to invest this way? Well, quite simply, you look for high-quality companies that are good value. They are likely to be on low to moderate P/E ratios. They should also have a substantial dividend yield. And they should have a record of steadily increasing that dividend over recent years, plus a commitment to continue to increase it in the future.
Value, solidity, size and diversification
Alongside value, you should look for solidity. Even if the company is on a low P/E ratio, it should have reasonable prospects. Don’t be tempted by companies that look cheap but that are also clearly in decline. Many of these companies are what I call ‘buggy whip’ businesses: they are in sectors that have a bleak future, such as newspaper publishers and high street retailers.
Anyone who bought into HMV (LSE: HMV) two years ago will know exactly what I mean. Sometimes companies that are in rapid decline will boast ballooning dividend yields, but don’t be caught out by them — the payouts are likely to be cut.
Should you go for blue chips or for small companies? Well, currently there is value to be found in both areas, but my strong preference would be for blue chips.
I think there are a wide range of blue chips that look really cheap at the moment. Plus I feel blue chips are less risky than small companies, and — of course — you should do everything to minimise risk. There are also fewer unknowns: it is far easier to be an expert on a leviathan such as Vodafone (LSE: VOD) than an obscure minnow, and knowledge is definitely power.
So, I have covered value, solidity and size. To this I would also add diversification. However confident you feel about a firm’s prospects, don’t put all your eggs in one basket. Instead, diversify across a range of different sectors.
Why? Because, believe me, you will make mistakes — we all do. Companies can be hit by all manner of unforeseen troubles — remember BP (LSE: BP)? By diversifying you are again reducing your risk.
And then just sit and wait
And that is pretty much it. Once you have carefully and patiently built up your diversified, high-yield, blue-chip portfolio, you just sit and wait while it appreciates. As more and more dividends are paid, you can invest in more and more shares. And so your portfolio grows.
Then, if share prices go up, you are happy, because you enjoy capital growth as well as all those juicy dividends. And if the share price falls, you are still happy, because you can use your dividend income to buy into more companies that offer good value and boast some very juicy dividends of their own.
Your portfolio should need no more than the occasional bit of pruning, but that’s all. Instead of nervously waiting for every market movement, and over-trading, you just keep collecting those dividend cheques, and keep adding to your portfolio. In this way, you really can be a happy investor — and, hopefully, a rich one, too.
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The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
A version of this article, written by Prabhat Sakya, originally appeared on fool.co.uk