The stock market provided mixed returns in 2023. If I’d have focused on US tech and growth stocks, I’d have done rather well. If I’d have focused on British value stocks, I probably wouldn’t have seen much in the way of returns.
So what could a successful investing strategy look like in 2024?
Diversification
Portfolio diversification is crucial for managing risk and enhancing returns in my investment strategy.
By spreading my investments across various asset classes like stocks, bonds, and other instruments, I aim to reduce the impact of a poor-performing asset on my overall portfolio.
Bonds, known for stability, provide a counterbalance to the volatility of stocks. Moreover, at the moment, bond yields are way above where they have been for the last decade. It may pay me to buy them and then forget about them.
Diversification helps me achieve a balanced and resilient portfolio, safeguarding against the unpredictability of individual assets and market fluctuations.
Risk exposure
Understanding risk is integral to my investment approach, considering my unique time horizon. Risk is not just about potential losses, but also the possibility of not meeting my financial goals within the set timeframe.
With a longer time horizon, I can afford to weather short-term market fluctuations and capitalise on higher-risk, higher-reward investments. This perspective allows me to navigate the inherent volatility of the market, aligning my risk tolerance with my investment horizon for a more strategic financial journey.
My investing strategy
The notion of the investment time horizon has been very important for me. I’ve been gearing up to buy a house for around 18 months and, finally, we’re getting near.
So why has that been important? Well, it’s shaped my exposure to risk. Requiring a significant deposit, I’ve been reducing my exposure to the more volatile parts of the market.
However, with my house buying capital put to one side, my strategy is changing, and that’s apparent in my stock picks. Simply put, I’m unlikely to need the money I’m putting aside for some time. And this means I’ll be moving £100,000 from strategy A to strategy B.
As such, my exposure to risk is changing, and I’m increasingly investing in growth stocks — a more volatile part of the market.
My favourite metric
Quantitative data should be central to any investment decision. But that’s not always straightforward with growth stocks that can look incredibly expensive using near-term metrics like the price-to-earnings (P/E) ratio.
This is why I really like using the price/earnings-to-growth (PEG) ratio. This is calculated by dividing the forward P/E by the forecasted earnings per share growth rate (three-five years).
A ratio below one tends to suggest the market hasn’t appreciated a company’s growth trajectory. If a company has a PEG ratio of 0.7, for example, it could be inferred that it’s undervalued by 30%.
Of course, I don’t buy stocks just according to their PEG ratios. I look to build a more complete picture. But as some of my recent purchases below highlight, the PEG ratio is key to my investments.
Stock
PEG Ratio
AppLovin
0.61
Celestica
0.64
Nvidia
0.91
Rolls-Royce
0.55
Super Micro Computer
0.66
There’s a caveat, of course, and that’s the fact that growth forecasts — which are central to this metric — can be wrong. This is certainly a risk worth bearing in mind.
The post This is how I’m investing £100,000 in the stock market in 2024! appeared first on The Motley Fool UK.
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James Fox has positions in AppLovin Corporation, Celestica Inc, Nvidia, Rolls-Royce Plc, and Super Micro Computer. The Motley Fool UK has recommended Nvidia and Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
