My investing approach has changed over the past two years. Before the coronavirus pandemic, I tended to spend most of my time focusing on undervalued securities. This was essentially value investing and worked well at the time.
However, last year taught me just how unpredictable the world can be and how difficult it is to pick stocks. Indeed, many of the companies I owned going into the crisis have struggled because the business environment has drastically changed.
As such, I’ve made some changes to my investing strategy. Now, rather than focusing exclusively on value stocks, I’ve increased my exposure to growth investments.
Over the past year, I’ve increased my exposure to high-quality growth stocks such as Diageo. This may not be a growth stock in the traditional sense, but I believe its portfolio of brands leaves it well-placed to navigate any investment environment.
I’ve also added to my holdings of insurance group Admiral. I’ve been impressed by the company’s recent efforts to diversify into different markets, as growth in its international divisions shows.
Last year, the group faced some significant challenges, as the demand for car insurance dropped. However, a lower level of claims offset this decline in revenues, helping to boost profitability overall.
Investing in single stocks is a process that carries significant risks. There’s no guarantee either of the companies outlined above will be able to achieve the kind of growth I’m looking for as we advance. They may also suffer from increased competition, which could restrict earnings growth.
Due to the challenges of investing in single stocks, I’ve also been increasing my holdings of investment funds.
In my opinion, investment trusts and funds offer a great way to build exposure to an extensive portfolio of stocks and shares relatively quickly.
I think this strategy is particularly helpful when investing in small- and medium-sized companies. These can be difficult to analyse. The diversification offered by these funds also provides a level of protection.
One I’ve been buying recently is the Henderson Smaller Companies investment trust. This firm owns a portfolio of over 100 different small- and mid-sized UK businesses.
At the beginning of this article, I mentioned one of the main lessons I’d learnt in the past year was the unpredictability of stock markets.
As a result, I’ve invested a large chunk of my portfolio in the S&P 500. This index provides exposure to some of America’s biggest and best technology companies. Moreover, unlike active funds, it doesn’t rely on asset managers to pick stocks.
Unfortunately, this strategy isn’t perfect. As the S&P 500 tracker is only designed to track the index, there’s no chance of it outperforming it. On the other hand, there’s a chance that Henderson trust could underperform the market if managers pick the wrong stocks.
The bottom line
Last year was an extraordinary one in many ways. It taught me a lot about investing and led me to make the changes to my portfolio I’ve outlined above. I believe these changes will help me cope with the uncertain environment that currently dominates the outlook for the economy and equity markets.
Rupert Hargreaves owns shares of Admiral Group, Diageo, and Henderson Smaller Companies Inv Trust. The Motley Fool UK has recommended Admiral Group and Diageo. 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.
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