Beating the market by investing in a portfolio of individual ASX shares and ETFs is difficult, but is definitely achievable. The average person willing to take the time to learn about the basics of share investing can achieve incredible wealth generation through a combination of saving, investing, compounding returns and time.
You have to be in it to win it
One of the toughest aspects of investing is understanding yourself and knowing your tolerance for risk. The majority of share market returns are achieved on a handful of amazing days, and so you need to be invested when those days happen. This is easier said than done!
Why? Well, because it hurts to lose – the feeling of loss is much greater than the feeling of gain. If we have something, we don't want to lose it. As a result, our natural tendency is to sell our stocks when there is a market crash, to stop them going down even further. But whilst we are holding the safe, low yielding cash, we are missing out on those potentially great days.
On his weekly podcast "Rule Breaker Investing", Motley Fool Co-Founder David Gardner repeatedly quotes that the market is up more years than it is down – roughly 2 of every 3 years, in fact.
That is why I have laid out 4 different types of investing styles below. Each of these types of investing has slightly different needs and risk profiles, with the level of volatility (a proxy for risk) reducing down the list.
Before starting on the list, take a moment to consider how you would feel if your portfolio of high quality businesses dropped 10%, 20% or even 40% in a short period of time. You want to be able to have the mental toughness and financial stability to hold through these drops, and so should invest in a bespoke combination that works for you and your risk tolerance level.
Growth shares
Growth investors buy companies with great potential for, well, growth. Generally trading on higher multiples of sales and earnings, investors often acquire a stake in these businesses with a long-term focus. Growth investors are acutely aware of the power of compounding and feel more comfortable with volatility.
Just check out the the share price charts for Shopify Inc (NYSE: SHOP) and Altium Limited (ASX: ALU). They are up 1,507% and 1,227%, respectively, over the last 5 years!
GARP shares
Growth at a reasonable price (GARP) is one way to minimise your downside risk. GARP investors look to find companies with strong growth potential, for which the current share price doesn't reflect said future. That is, they find growth companies with lower P/E and PEG ratios.
Currently, some ASX shares I see fitting the GARP mould are Aristocrat Leisure Limited (ASX: ALL) and Webjet Limited (ASX: WEB).
Value shares
At the heart of this approach is valuing a company, making it your job to work out if the market is correct in applying a discount to the company's share price. If you're right, you'll make some money, but if the market is right, then you may be buying a value trap.
Dividend shares
Dividend investing is buying shares that pay a portion of their current or past earnings to shareholders as a dividend. As Australians, we are lucky that we often also receive franking credits attached to our dividends. A franking credit is a tax offset for tax that a company has already paid on its profits. The yield you require from your portfolio will depend upon a range of circumstances, including how close you are to retirement.
A company that pays a dividend for 25 years or more in a row is known as a dividend aristocrat. Some Australian examples include Ramsay Health Care Limited (ASX: RHC) and Washington H. Soul Pattinson & Co. Ltd (ASX: SOL).
Bespoke investing
There are many more factors to consider when investing, but being comfortable and confident in your knowledge and investments is critical to beating the market. Invest how it best suits you.
