Diversification is one way to success and reaching financial goals. But great fortunes have always been built on concentration, not by diversification.
Some investors want more than simple diversification. May be they haven’t saved enough, started too late, retirement is costing more than expected or they simply like the challenge and satisfaction of earning higher returns. These type of investors require something different: a concentrated portfolio of well-chosen stocks.
If an investor wishes market beating returns in the years ahead, the best strategy is to invest in stocks that give you an edge. Here are the 3 types of stocks that can increase your overall performance:
1. Value stocks
Buy companies with good cash flow, excellent prospects, reasonable valuations and a sustainable competitive advantage (like trademarks, patents and brand names) and then hold them not just for years but for decades. This requires patience.
2. Momentum stocks
These are companies that lead the market in innovation, sales and earnings growth and positive surprises (like Apple and Amazon).
3. Stocks that corporate insiders are buying
Insiders have access to all sorts of information about the future prospects of their business. They know all about new products and services in development, the direction of sales, whether the company has gained or lost any major customers, whether any litigation against the company is about to be resolved. They have an advantage to the ordinary guy on the street who is looking from the outside. So, why not using their inside knowledge for your own investment?
The Securities and Exchange Commission requires corporate insiders to file and to detail any shares they buy and sell. Studies prove that insiders substantially outperform the market with their own investments.
So, instead of diversify in hundreds of different stocks, concentrate on buying the best of the best from these three groups. You probably will meet your financial goals much earlier!
Sven Franssen