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    Three Tips to Practice a Key Investing Discipline, According to Fisher Investments UK

    Three Tips to Practice a Key Investing Discipline, According to Fisher Investments UK
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    In Fisher Investments UK’s experience, selecting the best-performing shares doesn’t necessarily determine long-term investing success. Investor behaviour—including staying disciplined through emotional challenges—very often plays a bigger role. A key to maintaining discipline? Realising you could always be wrong. Fisher Investments UK has several basic tips investors can use to put this mindset into practice.

    One important step to take, in Fisher Investments UK’s view: Avoid overconcentration. Putting a large portion of your assets into a single firm’s shares makes your portfolio vulnerable to company-specific issues—including the risk of collapse. High-profile, if extreme, examples include German payment processor Wirecard AG, Portuguese lender Banco Espírito Santo and American energy firm Enron. But beyond these failures, concentrating in struggling companies like those in the oil and gas exploration industry in recent years could greatly harm portfolio results. In Fisher Investments UK’s view, no single company should exceed about 5% of your portfolio’s value—though this is more of a guideline than a strict rule.

    For companies with the largest market capitalisation (a measure of a firm’s size calculated by multiplying its share price by the number of shares outstanding) in a broad equity index, we think it makes sense to compare the percentage the company comprises in your portfolio to the percentage the company comprises in the index. If the percentage in your portfolio vastly exceeds the index’s weighting, you may have too much exposure to that company. A key part to this assessment: Ensure the equity index you are reviewing is actually broad. Many smaller European markets are dominated by one or two companies. If so, in Fisher Investments UK’s view, you must look more broadly.

    By avoiding overconcentration, you acknowledge you could be wrong about a company’s prospects. This is particularly important for companies or sectors you are familiar with because of personal knowledge (for example, work experience). That bias may create blind spots—that is, you may be wrong. Unless you are in senior management, it is unlikely you know everything about a company (and many senior managers of bigger firms rarely know all the details, either). Beyond the firm itself, external factors—including regulatory or legislative shifts—may hurt shares. They could also fall in sympathy if a competitor, supplier or peer suffers a major setback.

    Based on Fisher Investments UK’s experience, many investors recognise the issues with over-concentrating in a single company, so they seek to diversify—to spread their assets across multiple securities—to manage risk. But simply owning several companies doesn’t provide sufficient diversification, in our view. If you own a bunch of companies clustered in one sector, you may still run a type of overconcentration risk. Based on Fisher Investments UK’s analysis, firms within the same sector tend to behave similarly, as they respond to the same general economic and political factors affecting profitability.

    In Fisher Investments UK’s view, proper diversification means owning a variety of categories of shares that behave differently depending on economic and market conditions. The reason this is important: No matter how strong your opinion about what markets will do next, you could always be wrong. Diversification spreads both the risks and opportunities across different share categories. If one category gets slammed unexpectedly, it won’t sink your portfolio. Diversification also ensures you have exposure to unexpected good things that happen in areas you might otherwise overlook. Two common category examples: sector and geography. For the former, equity index provider MSCI lists 11 different equity sectors, including Technology, Financials and Energy. A diversified portfolio will have some exposure across these sectors, as each responds to different economic drivers. Geographically, we don’t think investors should focus only on their home country’s market, which may skew to just one sector (or even company). Looking beyond your borders provides opportunities to owning different types of companies—and also protects against country-specific political risks or sector/company overconcentration.

    Beyond portfolio construction, one of long-term investing’s biggest challenges is not acting on emotions. Feelings can flip frequently and, in investing, could be dangerously wrong. Fear may lead you to sell after a decline. Greed could drive you to buy into surging shares after they rise. These emotional decisions can make it harder to reach your investment goals. Based on Fisher Investments UK’s analysis, long-term investing success comes from obtaining market-like returns over your time horizon—the period in which you need your portfolio to provide for you. Whilst other factors, including risk tolerance, are important, Fisher Investments UK thinks keeping your specific goals and objectives front of mind can instil discipline. If the temptation to act on emotion arises, consider the risk to your goals if your decision proves wrong.

    Interested in other topics by Fisher Investments UK? If you have £250,000 or more to invest, get our ongoing insights, starting with starting with a copy of 10 Retirement Investment Blunders to Avoid.

    Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom.

    Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.