Tag: Motley Fool Australia

It’s tempting to just hold cash when there’s market volatility rather than buying ASX shares.

That’s certainly been on my mind in 2020 as we saw the S&P/ASX 200 Index (ASX: XJO) quickly turn from record high into a bear market.

So, should we all really be holding cash and waiting for the market to fall further?

Time to buy ASX shares or hold more cash?

Let’s start with the good things about holding cash.

For one, it’s safer. Cash is about as safe an investment as they come which can be good if you’re nervous about the share market.

Another benefit of cash is that it provides a buffer while times are tough. Many Aussies are facing the prospect of low or no wages in the short-term which means cash may be king right now.

There’s also the chance to stockpile cash and buy ASX shares cheaply. Most of the big market crashes in recent years have taken 12-18 months to actually reach rock bottom.

Despite falling lower in February and March, the ASX 200 has rebounded strongly. This could mean there are further falls to come as economic data and corporate earnings deteriorate.

However, holding cash isn’t necessarily the ‘safe bet’ you might think.

Firstly, there’s the opportunity cost. If you sit on the sidelines, you might miss out on potential gains.

That’s been obvious from the recent ASX share market rebound. If you sold your holdings in mid-March, you might have had to buy back in at a higher price rather than just riding the wave.

Secondly, there’s plenty going on to support the share market right now. This includes the central banks lowering interest rates as well as continued government stimulus packages pumping money into the economy.

If ASX shares don’t crash as you expect, you could miss out on potential gains. Even if they do crash, you might still have been better off buying and holding for the long-term.

Foolish takeaway

It’s easy to become spooked and consider holding more cash when ASX share prices are volatile .

While cash isn’t itself a bad thing and can be good to have a safety buffer, it may not be wise to go all-in.

It’s important to remember your long-term time horizon and not panic-sell at the first sign of ASX share price falls.

If you’re really that worried about your short-term gains or losses, maybe you’re not ready to invest in shares.

Another option could be to hold defensive healthcare or energy shares, such as CSL Limited (ASX: CSL) or AGL Energy Limited (ASX: AGL), to ease some of of your nerves.

More reading

• Is 2020 a good time to get a credit card?
• Are Macquarie Group shares worth investing part of $3,000 into this June?
• What the 10 largest companies in the world have in common
• Why is it so hard to outperform the ASX 200 index?
• ASX 200 closes higher, banks keep rising

Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Do you have $3,000 to invest in shares this month? Below I’ll share my top three picks in BetaShares NASDAQ 100 ETF (ASX: NDQ), CSL Limited (ASX: CSL) and Macquarie Group Ltd (ASX: MQG) shares to either add to or help you start your share portfolio.

I believe that shares are a much better alternative to keeping your money in a savings account or term deposit. The interest earned there often doesn’t even cover inflation.

BetaShares NASDAQ shares

The NASDAQ 100 ETF is comprised of the 100 largest, non-financial businesses on the US NASDAQ exchange.

Australia’s tech sector is tiny compared to the US market. So, purchasing this exchange-traded fund (ETF) gives you instant diversification to a much larger tech market.

It is home to some of the world’s most successful businesses with a high proportion being larger companies. This includes tech giants Amazon, Facebook, Microsoft, Google, Netflix and Apple.

Many of these companies are world-leading brands, have strong positions in market niches and strong cash flow. 

A significant proportion has also seen share price growth over the past 5 years well above a 10% average per annum. I believe that many will continue to grow strongly over the next decade. This, I feel, is likely to lead to above-average returns for this ETF, well into the next decade.

CSL shares

CSL has become a global market leader in blood plasma research and disease treatment. It now reaches more than 60 countries.

Its strong growth over the past few years has been driven by high investment in research and development to create new products.

CSL has invested significantly in research and development over the last 5 years. This creates a pipeline of new products. In FY19 alone it invested $832 million.

I believe that CSL is well-positioned to deliver strong earnings growth over the next 5 to 10 years. This I feel, is likely to lead to continued strong share price growth.

Macquarie Group shares

Macquarie is a global financial services giant, headquartered in Australia, with a core focus on international investment banking.

I think it is a good option if you want to gain some exposure to the financial services sector. I also believe that it is a better option than our 4 big banks.

Its business model has evolved significantly over the last decade. Macquarie has now become a more balanced and diversified business. Whereas, in the past, it was too heavily focused on a small product set. For this reason, it got into trouble during the global financial crisis.

Macquarie also currently pays an attractive trailing annual dividend yield of 3.6%.

More reading

• What the 10 largest companies in the world have in common
• Why is it so hard to outperform the ASX 200 index?
• CSL share price lower despite COVID-19 vaccine news
• Brokers name 3 ASX shares to buy today
• 2 ASX growth shares I’d buy before Afterpay shares

Phil Harpur owns shares of CSL Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended BETANASDAQ ETF UNITS and Macquarie Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The S&P/ASX 200 Index (ASX: XJO) was on form again last week and recorded a very strong gain. The benchmark index climbed 4.2% over the five days to end at 5998.69 points.

While most shares on the index pushed higher, some climbed more than most. Here’s why these were the best performers on the ASX 200 over the period:

The Pilbara Minerals Ltd (ASX: PLS) share price was the best performer on the ASX 200 last week with a massive 36.5% gain. This was despite Chinese lithium prices falling to their lowest levels of the year last week amid lacklustre demand for the battery making ingredient. Pilbara Minerals is one of the most shorted shares on the ASX with short interest of 9.25%. I suspect some of its gains could have been down to short sellers buying shares to close their positions.

The Unibail-Rodamco-Westfield (ASX: URW) share price was on form for once and surged 28% higher last week. This appears to have been driven by optimism over the reopening of economies and bargain hunters taking advantage of a recent collapse in the shopping centre operator’s share price. Even after last week’s gain, Unibail-Rodamco-Westfield’s shares are down 55% from their 52-week high.

The Adbri Ltd (ASX: ABC) share price was a strong performer last week with a 27.6% gain. The catalyst for this strong gain was the government announcing a $688 million HomeBuilder program to support the construction industry. This program will see Australians offered $25,000 grants to build a new home or start a major renovation. Adbri, previously known as Adelaide Brighton, looks well-placed to benefit as a building materials provider.

The Perenti Global Ltd (ASX: PRN) share price wasn’t far behind with a 23.5% gain last week. This was despite there being no news out of the mining services company. These latest gains mean that Perenti, formerly known as Ausdrill, has seen its shares rally 225% higher since dropping to a 52-week low in late March.

The Bendigo and Adelaide Bank Ltd (ASX: BEN) share price caught the eye last week with a 19% gain. Investors were piling into banking shares again on the belief that the sector’s outlook was not as bad as first feared. The big four banks were also strong performers and played a key role in driving the ASX 200 higher.

More reading

• ASX 200 hits 6,000 points: Westpac provide AUSTRAC update, Vocus reaffirms guidance
• This embattled ASX 200 company could be the next M&A target
• These ASX shares are set to get a big boost from the next big government stimulus
• ASX 200 up 0.6%: NAB charges higher, ACCC investigates Qantas acquisition
• 3 ASX 200 shares to watch this week

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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It certainly was a fantastic five days for the S&P/ASX 200 Index (ASX: XJO) last week. The benchmark index stormed 4.2% higher over the period to end at 5998.69 points.

Not all shares were able to climb higher with the market, though. Here’s why these were the worst performers on the ASX 200:

The Gold Road Resources Ltd (ASX: GOR) share price was the worst performer on the ASX 200 last week with a 14.4% decline. This was driven by a pullback in the gold price after risk appetite improved. A number of other gold miners including Evolution Mining Ltd (ASX: EVN), Northern Star Resources Ltd (ASX: NST), Saracen Mineral Holdings Limited (ASX: SAR), and Silver Lake Resources Limited (ASX: SLR) were also among the worst performers during the week.

The Nufarm Limited (ASX: NUF) share price was a poor performer last week and fell 8.9%. This decline appears to have been driven by a broker note out of Macquarie. According to the note, the broker downgraded Nufarm’s shares to an underperform rating with a $4.85 price target. Its analysts were underwhelmed with its trading update and appear concerned over its prospects in the important fourth quarter.

The Pro Medicus Limited (ASX: PME) share price was out of form and fell 8% over the period. This was despite the healthcare technology company announcing a major contract win. It appears as though a broker note out of UBS offset this good news. The broker downgraded Pro Medicus’ shares to a neutral rating with a $29.65 price target. It made the move on valuation grounds.

The TPG Telecom Ltd (ASX: TPM) share price wasn’t far behind with a 7.2% decline last week. It looks as though some investors were taking a bit of profit off the table after a strong share price gain over the last month. TPG Telecom’s gain since the beginning of May was driven by optimism over the progress it is making with its merger plans with Vodafone Australia.    

More reading

• ASX 200 down 0.35%: UBS upgrades NAB and Westpac, Qantas soars again
• Top broker tips the Vocus share price to zoom higher
• 5 things to watch on the ASX 200 on Friday
• Why the Nufarm share price is crashing lower today
• These ASX healthcare shares could be long term market beaters

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Pro Medicus Ltd. The Motley Fool Australia has recommended Pro Medicus Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Building long-term wealth through an ASX growth portfolio and inclusions like Afterpay Ltd (ASX: APT) shares is a lucrative path tempting many investors. Sure, you don’t get the certainty and income that more mature, dividend-paying companies can offer. But hitching your wagon to a real winner can be a life-changing experience.

So, with that in mind, here’s how I would build a $100,000 ASX portfolio with ASX growth shares.

Spend $25,000 on Xero Limited (ASX: XRO) shares

Xero has been one of the biggest growth stars of the ASX for a few years now – and for good reason. This cloud-based software as a service (SaaS) company has baked up a storm with stellar subscriber growth numbers and a scalable business model. Last year alone, this company grew its subscribers by double digits in the target markets of the United Kingdom, the United States and Australia.

It grew revenue by 30% – giving an indication of the company’s potential. Perhaps, unfortunately, the market has long known about its potential and shares are, therefore, priced accordingly. But that doesn’t stop a real winner in the end.

Spend $25,000 on BetaShares Global Cybersecurity ETF (ASX: HACK) shares

Aside from having my favourite ticker symbol on the ASX, I think this exchange-traded fund is a worthy investment for a growth portfolio. As the name implies, this ETF invests in companies operating in the digital security sector.

I think the demand for cybersecurity services will continue to rise with the flood of commerce moving online every year (clearly accelerated in 2020). And these are exactly the kinds of companies HACK invests in. Some of its current holdings include Crowdstrike, Splunk, Cisco, and Palo Alto.

Spend $25,000 on Pushpay Holdings Ltd (ASX: PPH) shares 

Pushpay is another payments company. But unlike Afterpay’s buy now, pay later offering, this business targets the very niche area of donation management. It provides a model for any organisation that might still rely on the old ‘pass the hat around’ funding model – think churches and charities.

The signs of the trend toward a cashless society are now becoming incontrovertible. This stems heavily from the coronavirus pandemic. As such, I think this company is worth having some faith in.

Lastly, spend $25,000 on Afterpay shares 

Finally, you can’t have a real ASX growth portfolio without at least considering this wunderkind. And after consideration, I think Afterpay shares more than deserves a role in our growth portfolio. This company has a remarkable track record of proving its detractors wrong over its short life. It has been able to easily crack the US and UK markets and appears to be growing strongly throughout this recent coronavirus crisis, despite fears over credit risk.

I think Afterpay has a decent chance at one day rivalling the US-listed payment giants like Mastercard (NYSE: MA), Visa (NYSE: V) and American Express (NYSE: AXP). Thus, I think it’s a deserving company to have in our ASX growth shares portfolio.

More reading

• What ASX shares should you invest in during a bull market?
• What the 10 largest companies in the world have in common
• 2 ASX growth shares I’d buy before Afterpay shares
• 3 of the best ASX 200 tech shares for your watchlist
• The Xero share price just hit a record high: Is it too late to invest?

Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO, PUSHPAY FPO NZX, and Xero. The Motley Fool Australia owns shares of BETA CYBER ETF UNITS. The Motley Fool Australia has recommended PUSHPAY FPO NZX. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The 2020 stock market crash could cause investors to become increasingly concerned about their portfolio’s capacity to survive an uncertain economic outlook. After all, with many industries likely to suffer from reduced demand for their goods and services, it could prove to be an uncertain period for the stock market.

Through buying a diverse range of financially sound companies with defensive characteristics, you could protect your portfolio from a future market crash.

Diversification

Perhaps the simplest and most effective means of reducing your portfolio’s risks is diversification. Holding a larger number of companies reduces your reliance on a small number of businesses to generate capital growth or income, which is likely to make your portfolio returns more stable and consistent.

Furthermore, investing in multiple geographies and industries could reduce your overall risks. For example, the coronavirus pandemic is likely to affect some regions and sectors more than others. By having exposure to a wide range of countries and industries, you may be better able to protect your portfolio’s returns in the long run.

Fortunately, the cost of buying stocks has fallen significantly over recent years through the growth in online sharedealing. Therefore, diversification is cheaper and more accessible to a larger number of investors than it used to be.

Defensive stocks

Buying defensive stocks could limit your losses during a market crash. Defensive stocks are generally less impacted by an economic downturn than their cyclical peers. They may, for example, have business models that are relatively unreliant on the performance of the economy. This may allow them to deliver solid financial performances even during a recession or depression.

Examples of sectors where defensive stocks may be found include utilities, tobacco and healthcare. Although they may not necessarily offer capital growth during bull markets that can match that of cyclical businesses, they may continue to be relatively popular among investors during challenging market conditions. As such, their total returns in the long run could prove to be relatively impressive.

Financially-sound businesses

Another means of preparing for a market crash is to buy stocks that have solid financial positions. This may include companies that have modest debt levels, access to multiple sources of finance, as well as large cash balances. They may be able to withstand a period of lower sales or even losses better than their sector peers. This could make them attractive to investors, which may help to support their stock prices.

Through analysing company annual reports and investor updates, it is possible to build a relatively accurate picture of the financial strength of a business before buying it. Taking the time to understand its balance sheet strength could help you to avoid severe declines during a market crash, which could lead to higher returns from your portfolio over the long term.

More reading

• These were the worst performers on the ASX 200 last week
• Building a $100,000 portfolio with Afterpay shares and 3 other ASX companies
• ETFs I’d pick to build a passive portfolio
• Coronavirus: why I’d buy shares during this market volatility
• What ASX shares should you invest in during a bull market?

Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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How to invest passively

ETFs are a great way to build your wealth passively in my opinion. Also known as exchange-traded funds, ETFs are a great investment tool.

The idea of an ETF is that you can invest in dozens (or hundreds) of businesses or assets in a single investment. I think it’s much easier than buying all those shares yourself. Many of the best ETFs also come with cheap management fees.

But which ETFs are you meant to buy? Some people like the idea of Vanguard Diversified High Growth Index ETF (ASX: VDHG) because of the diversification offered. But I don’t think investing in bonds at this price makes sense and low yield makes sense.

I’d put together an ETF portfolio with these weightings:

BetaShares Australia 200 ETF (ASX: A200) – 30%

If you’re going to invest in ASX shares you may as well go for the cheapest option. BetaShares offers this one for an annual fee of just 0.07% per annum.

You get decent diversification with shares like CSL Limited (ASX: CSL), Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP), Macquarie Group Ltd (ASX: MQG) and Wesfarmers Ltd (ASX: WES).

One of the more attractive things about this ETF is the income benefits. Not only do ASX shares generally have generous dividend payout ratios, but those dividends also come with franking credits.

This option covers the Australian shares.

iShares S&P Global 100 ETF (ASX: IOO) – 40%

The biggest businesses in the world are steadily accumulating more market power and selling more services to the world.

Shares like Microsoft, Amazon, Apple, Facebook, Alphabet and so on are very compelling businesses today and their known projects like VR and automated cars are also exciting.

What I like most about this ETF is that it’s invested in the biggest global businesses, it doesn’t really matter which country they come from.

This ETF gives us the global blue chip exposure we need.

Betashares FTSE 100 ETF (ASX: F100) – 20%

The global share market doesn’t provide much income and I’m cautious about getting too much exposure to the US share market right now considering what might happen over the next months leading up to the election.

The UK share market could be one of the best ways to get international diversification whilst avoiding US shares.

Within this ETF are plenty of quality shares like Astrazeneca, GlaxoSmithKline, HSBC, Diageo, Unilever, Reckitt Benckiser, Vodafone, National Grid, the London Stock Exchange and so on.

As a bonus, at the end of April 2020, the underlying trailing dividend yield was almost 6%, although it’s obviously a bit lower now.

Vanguard FTSE Asia ex Japan Shares Index ETF (ASX: VAE) – 10%

Asia is a very interesting place to invest in shares. It’s home to some of the world’s biggest technology companies like Tencent, Alibaba, Taiwan Semiconductor Manufacturing and Samsung. But this ETF is actually invested in over 1,250 shares. I think that’s excellent diversification. 

The Asian middle class have been getting steadily richer over the years and this is giving them more spending power.

As the coronavirus pandemic subsides and/or an effective treatment is produced, the Asian region is likely to get back to the solid growth it was seeing before all of the restrictions.

The ETF has a decent dividend yield and attractive statistics like a return on equity (ROE) ratio of around 14.75%.

Foolish takeaway

All of these ETFs are quality options in my opinion. If I only had $1,000 to get started with today I’d go for the UK ETF because of its solid diversification, but with less exposure to the US than many other index options.

More reading

• What the 10 largest companies in the world have in common
• Ready to invest your first $2,000 in ASX shares? Do these 3 things first
• How to become a millionaire by investing in ASX shares
• I don’t normally buy ETFs, but I would buy these 2
• How to make $1,000 a month in dividends

Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia owns shares of Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The market volatility caused by coronavirus could produce some of the best buying opportunities in many years for long-term investors in shares.

Certainly, there are potential risks ahead. The world economy faces one of its biggest-ever challenges, and may experience a prolonged period of disappointing growth.

However, many high-quality businesses are likely to survive such a period. Buying them now while they offer wide margins of safety and holding them for the long run could yield high returns.

Market volatility

The past performance of the stock market suggests that the best buying opportunities occur when market volatility is at its highest. During such periods, many investors become increasingly fearful about the prospects for their portfolios. This can mean that demand across the investment community for equities declines, thereby causing stock prices to fall.

Although in some cases investor caution towards the stock market is warranted, since some stocks may not survive an economic shock, the wider market has a strong track record of recovering from its downturns. Therefore, investors who can live with the potential for disappointing performance from their portfolios in the short run, while sentiment among their peers is weak, could benefit from long-term recoveries that boosts the performance of their portfolios.

High-quality stocks

As mentioned, not all companies survive recessions. Therefore, it is imperative that investors focus their capital on those businesses that have a high chance of survival. They are likely to include established businesses with long track records of delivering improving profitability in a wide range of operating conditions. They may also include companies with low debt levels, strong cash flow and wide economic moats that protect them from the potential for lower sales and profitability in the coming months.

Although such companies may trade at higher prices than their weaker peers, paying a premium for a high-quality stock could be a prudent move. It may substantially lower your overall risks, and still leave a large amount of capital growth potential over the long run.

Buy-and-hold

Buying ASX shares during the current period of high market volatility is just one part of successfully capitalising on lower valuations. To maximise your returns, holding stocks for a long time period may be necessary. It could take many years for the world economy to overcome its current challenges, and for the strongest businesses within a specific industry to extend their dominance over weaker peers.

Therefore, a buy-and-hold strategy could be a sound means of capitalising on current market volatility and the likely recovery potential of the stock market. It has historically been a successful strategy that has helped many investors to take advantage of uncertain market conditions. Although the world economy may be facing an unprecedented crisis, it could do likewise over the coming years and may lead to a significant improvement in your financial situation.

More reading

• What ASX shares should you invest in during a bull market?
• 3 simple investment rules I follow
• EML Payments and these ASX mid cap shares could be destined for big things
• What the 10 largest companies in the world have in common
• Why is it so hard to outperform the ASX 200 index?

Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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What ASX shares should you invest in during a bull market?

It’s a tough question because many shares have performed so strongly. The S&P/ASX 200 Index (ASX: XJO) has risen by 31.8% since 23 March 2020. That’s an amazing performance.

But where are we supposed to invest now with many shares now trading close to, or above, their pre-coronavirus highs?

The recovery of some shares has been incredible. The Afterpay Ltd (ASX: APT) share price is above $50. The ASX Ltd (ASX: ASX) share price almost reached $90. The Xero Limited (ASX: XRO) share price briefly went above $90 this week. The Kogan.com Ltd (ASX: KGN) share price is flying high.

The Australian economy continues to recover and we are in a much better position than Europe or the US. The ASX is justifiably on an upward trend. I’d be more concerned with the US share market than ours.

What ASX shares should we invest in?

I think we should take the same approach as we always do with shares. Is it good value today considering its prospects and the potential that things won’t work out perfectly?

Vanguard Australian Shares Index ETF (ASX: VAS) could be a decent option considering it’s still noticeably lower than before the coronavirus sell off.

There are some shares that I think still look good value considering the global uncertainty regarding the pandemic and the economic effects. I think stocks like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) and Brickworks Limited (ASX: BKW) could be great value. Businesses such as Bubs Australia Ltd (ASX: BUB) and Pushpay Holdings Ltd (ASX: PPH) could grow into big businesses.

I also like the idea of some top performing fund managers who are playing it more cautiously like MFF Capital Investments Ltd (ASX: MFF) and Magellan Global Trust (ASX: MGG).

More reading

• What the 10 largest companies in the world have in common
• ASX 200 closes higher, banks keep rising
• Ready to invest your first $2,000 in ASX shares? Do these 3 things first
• 2 ASX growth shares I’d buy before Afterpay shares
• 3 of the best ASX 200 tech shares for your watchlist

Tristan Harrison owns shares of Magellan Flagship Fund Ltd, MAGLOBTRST UNITS, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO, PUSHPAY FPO NZX, and Xero. The Motley Fool Australia owns shares of and has recommended Brickworks, BUBS AUST FPO, Kogan.com ltd, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended PUSHPAY FPO NZX. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Having a simple set of investment rules could prove to be highly valuable, given the uncertain outlook for the stock market. Economies across the world are set to experience sharp declines in GDP growth and a rise in unemployment figures due to the lockdowns put in place to contain coronavirus.

By investing in companies you understand, buying them at a discount to their intrinsic value and ignoring market noise, you could capitalise on the current uncertain outlook for the stock market.

Investing in what you know

It is impossible to have a sound understanding of every sector and industry within the stock market. As such, it makes sense to focus your capital on those areas where you have a solid foundation of knowledge. It may mean that you find it easier to spot investment opportunities that go on to deliver high returns in the long run.

Similarly, it may mean that you avoid unnecessary risks. Someone without a good understanding of a sector may miss an obvious threat to its future, while an investor who has knowledge of the industry may be able to avoid common mistakes.

While it takes time to acquire knowledge about companies and the sectors within which they operate, only investing in what you understand can improve your risk/reward ratio. If you have limited knowledge, it may be a good idea to only invest in a small number of sectors and use tracker funds to obtain diversification with the rest of your capital until such a time that you have sufficient knowledge to invest directly in a range of businesses.

A margin of safety

Another investment rule that could improve your returns is obtaining a margin of safety when purchasing a stock. This essentially means that you value a company, and seek to buy it at a discount to that price. This strategy provides risk reduction, since there is a margin of safety in case unforeseen events occur or your analysis has missed relevant issues that impact negatively on a stock’s price.

At the present time, many stocks trade on wide margins of safety. As such, there appear to be numerous opportunities to obtain a large discount to a company’s intrinsic value across the stock market.

Market ‘noise’

Market ‘noise’ is the views and opinions of other investors that could influence your investment-making decisions. Ignoring them can be difficult, but also beneficial to your overall returns in the long run.

Many investors become overly emotional during boom and bust periods. This can affect their decision-making ability, and following their views can likewise be detrimental to your portfolio’s performance.

Therefore, having an investment rule that ignores the views of your peers and instead focuses on facts and figures when deciding which companies to purchase could be a means of strengthening your portfolio’s long-term outlook.

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Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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