These days, in investment terms, the world’s your oyster and while choice can often be good, it can also be confusing. Fortunately, the fundamentals of picking good investments have stayed the same for many years. Here is our five-step guide to creating a great investment portfolio.
We are aware that companies in certain high-tech sectors can offer storming returns, but we’d suspect that others don’t and that to work out which is which, you need to have some knowledge of the sector. Otherwise, stick to investments where you are sure you understand the product or service. Even if you do understand a niche market like pharmaceuticals, remember that there’s a difference between glamorous and profitable and hence companies which produce everyday items can also be good investments. In addition to understanding the product or service itself, you need to understand how the company actually makes money from it e.g. wholesale, retail, licensing. Again, complicated models can be profitable, but you need to be sure you understand them, otherwise stick with simple.
As a side note to both of these comments, even though you can invest pretty much anywhere in the world, there’s a lot to be said for sticking to companies based in the UK, especially if you’re looking to keep life simple. The reason for this is that even though companies may provide investor documents, which look very similar to those issued by their UK-based counterparts, they could be operating in very different legal and regulatory frameworks and this could make a huge difference to their potential value as investments.
You obviously need to crunch the numbers before putting your money into any investment, but if you’re looking for a quick rule of thumb to whittle down your options then look for companies who are at the top of their niche. It may be absolutely fine if the niche is small, just as long as they are at least one of the major players in it.
You may think that this statement automatically rules out younger companies with the choice investment returns they can offer, but actually nothing could be further from the truth. Young companies are founded by people and these people founded the company for a reason. The best young companies will make it easy for potential investors to find out who is behind them and hence be able to judge the quality of their management. In fact, if you take a look at the best young companies, you’ll often find that they have been created by people with a lot of relevant experience and a previous track-record of success.
Short-term investments are the place to put money you can live without right now, but would like to have back ready for your use in a relatively short period of time. When interest rates were higher, leaving money in a bank account, was sometimes a sensible option, but these days it really takes very little to beat even the best savings-account rates and the best short-term investments can smash them out of the park. In fact, they can even beat some of their longer-term counterparts. In particular, be on the look out for bond issues from young companies looking to fund growth (especially if they are backed by tangible assets such as stock). Companies may prefer bond issues to getting credit by other means since it allows them to build relationships with investors, some of whom may go on to invest in the company over the longer term. Obviously do your homework, but always be alert to these opportunities as they can be some of the best out there.
Up-and-coming companies, hidden champions, companies in tough market segments but with strong fundamentals, tread with caution, but there are some great investing opportunities to be found by being bold where others are fearful and being knowledgeable where others have yet to learn.
If you would like to talk to us about our own short term investment opportunities please contact us.