Enjoying a well-deserved retirement is a goal of most, if not all, investors.
While buying stocks in the Straits Times Index (SGX: ^STI) or S&P 500 could improve your chances of generating significant retirement savings, focusing on the best companies in an index is likely to move the odds even further in your favour.
With that in mind, here are three ways that you could improve your chances of finding the best investment opportunities within the stock market.
By doing so, you could improve your chances of retiring with a significant nest egg.
Focus on fundamentals
A company’s fundamentals remain the most important area for any investor to concentrate on.
Factors such as debt levels, free cash flow and return on equity should be carefully scrutinised to determine the health of the business before a stock is purchased.
Otherwise, buying high-growth stocks which have weak fundamentals could lead to severe losses when the next recession hits.
On the other hand, purchasing stocks with strong balance sheets and healthy cash flows allows you to sleep well at night, knowing that your money is secure.
It is difficult for any investor to be an expert in all sectors.
For example, the key drivers of the oil and gas industry are vastly different to those of the retail or pharmaceutical sector.
As such, it may make sense for an investor to pick a relatively small number of industries where they feel they may be able to gain a competitive advantage over their peers.
This focus could allow them to spot undervalued opportunities, or companies which may not be widely-known among other investors, but that are performing well from a business standpoint.
Of course, gaining exposure to a wide range of sectors within a portfolio is also a logical move.
It can be risky to over-concentrate your investments in just a handful of sectors.
There is something for everyone, whether you are a growth or dividend investor.
Investors buy stocks for a variety of reasons.
An investor may be bullish about the growth potential of the business, or the company may have a strong management team in place.
However, the most appealing reason in the long run for buying any stock is because it trades below its intrinsic value.
In other words, it offers a discount to what the business is worth.
When such discounts materialise, it creates opportunities for investors to generate higher returns as compared to purchasing a fully-valued company.
It may also provide some support in case a difficult period is experienced by the stock in question.
Buying undervalued stocks is not a particularly complicated style, but it does require a fair amount of patience and discipline.
Since it stacks the odds further in an investor’s favour, it could lead to high returns in the long run and is a strategy worth considering.
Get Smart: Focus on the important aspects
Clearly, finding the best businesses to buy is never an easy task.
The world changes and evolves as businesses go through economic cycles.
But by focusing on valuations, fundamentals and specific sectors, it is possible to enjoy a worry-free retirement along with a comfortable nest egg.
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Disclaimer: Royston Yang does not own any of the companies mentioned.