Years ago, when I first started out investing in shares on the London stock market, my financially literate uncle had two words of advice: “Be careful!”
And it’s the best advice he could have given me. Furthermore, it chimes with advice from the stock market greats such as Warren Buffett with his advice: “Don’t lose money.”
The biggest investing mistake
Over the years, I’ve learnt that losing money irretrievably is the biggest mistake it’s possible to make when investing. The maths works against us with a losing portfolio. For example, losing 50% on a share takes a 100% gain just to break even again. And 100% gains don’t arrive every day.
I reckon the best way to aim to protect my portfolio from downside risks is by choosing shares carefully after much research and due diligence. So, I’d look for high quality in the underlying business, a reasonable valuation, and good forward prospects for the enterprise. On top of that, I’d want every underlying business to be well-financed with a sensible balance sheet.
However, at the beginning of my investing career, I also aimed to invest in companies with larger market capitalisations. Typically, they’d be from the FTSE 100 and FTSE 250 index. And that tactic is a good one because those shares tend to have plenty of liquidity, meaning I can get in and out of positions easily. They also often react more slowly to news flow than stocks of companies with smaller market capitalisations.
Those indices are good hunting grounds for the new investors. However, all shares come with risks. And it’s possible to lose money on shares even though they represent big underlying businesses.
Long-term investing in defensive, stable sectors
Another tactic that helped save my bacon in the early years of investing was to hold shares for the long term. But some sectors are more suited to long-term investing than others. For example, cyclical sectors are known for their boom and bust economics and their volatile share prices. I wouldn’t write off those sectors, but timing is more important than ever. And for me, holding periods tend to be shorter.
However, some sectors tend to be more stable, such as utilities, IT, fast-moving consumer goods, technology, pharmaceuticals and others. And within those sectors, I can find plenty of big-cap companies ideal as first-time long-term investments. However, despite my faith in them, there’s always the possibility that underlying operations could underperform leading to a losing position in the shares.
Right now, I’d direct the younger me to shares such as GlaxoSmithKline, AstraZeneca and Smith & Nephew in the pharmaceutical and healthcare sectors. And I’d choose stocks such as British American Tobacco, PZ Cussons, Reckitt, Unilever and A G Barr in the fast-moving consumer goods sector. Then, in utilities, I’d look closely at shares such as SSE, Severn Trent and National Grid.