Although 2016 was a challenging year for investors, I feel my investment strategy held up well and I’ll be sticking to my strategy in 2017. Here’s a brief look at how I invest my funds.
Asset allocation
Asset allocation is an integral yet unique part of any investor’s strategy, and I’ve realised that it’s important to diversify across multiple asset classes and ensure I’m not over-exposed to equities.
I learnt the hard way in the Global Financial Crisis when my equity portfolio, which made up a large proportion of my wealth at the time, suffered heavily. For this reason, I now ensure that my wealth is spread across several asset classes and not just shares. Equities are no doubt an excellent asset class for building long-term wealth, but it’s important to realise that global markets can drop by 20%-30% in the blink of an eye and therefore it’s vital to have assets other than shares.
But how to weight a share portfolio for the best return? Within equities as an asset class, I like to have around two-thirds of my funds invested in dividend growth stocks. These stocks form my core holdings, providing a degree of stability as well as a consistent stream of dividends that can be reinvested back into the market to capitalise on the power of compounding.
The other third is allocated to growth stocks, with 70% of this third invested in higher quality mid-cap stocks and the remaining 30% in small-cap stocks. I find that overall, this strategy works well for me and provides a mix of stability, dividends and capital growth.
Diversification
Within my equity portfolio, I like to be diversified across many different sectors, geographies and market capitalisations.
Diversification is an essential part of risk management and can prevent a portfolio suffering badly in the event of a company, sector or country downturn. Just look at what happened to UK-focused companies after the Brexit vote in June. Firms such as Lloyds Banking Group and Aldermore Group were punished badly by the market while those with global revenue streams such as Diageo and Unilever outperformed.
(Some) cash is king
Having cash available on the sidelines is another important component of my investment strategy. I’ve realised that I don’t always need to be fully invested and that cash gives me options. There’s nothing more frustrating than seeing the market drop 20% and not being able to take advantage of lower share prices. For this reason, I like to have at least 10% of my portfolio in cash, so I’m ready to capitalise on opportunities when they arise.
Quality companies
Lastly, my goal is to buy high quality companies when sentiment is low and valuations are attractive. While there are many great companies across the FTSE 350 that have generated strong long-term returns, a great company doesn’t always make a great investment. It’s all about buying the company at a reasonable valuation.
My goal is to pick up companies like Diageo or Imperial Brands after their shares have been sold off by 10%-20%, as it means that I’ll receive a higher dividend yield and have a better chance of future capital growth. I keep a watchlist of companies to buy in the future and then wait patiently until valuations look attractive. I’m hoping 2017 brings a few opportunities to buy quality companies at great prices.