Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

Finetuning your investment strategy

Lesson 1 of 6

How to pick the right investments

Deciding to invest over having a traditional savings account is the first step in your wealth-building journey. Your next big decision is to choose which markets to invest in.

Many share dealing platforms provide access to stock markets around the world, each representing hundreds or even thousands of companies and funds.

So how do you know which market to choose? There are a few key factors to consider.

The home market advantage

For most new investors, the local stock market is a great starting point. The companies listed on your resident exchange could be companies you’ve known all your life. This means you understand what they do and how they make money, especially if you’re a direct consumer.

Many investors seek out companies that offer services they use. The company profits from the investor’s patronage, and the investor profits from the company’s rising value. This is often called a ‘lifestyle investment’.

Because you probably understand local investments better, you’ll likely also know which companies operate in the same sector. This is important information that’ll help you diversify your portfolio. We’ll speak more about this later in this course.

Investing in local companies also offers an opportunity to pick up some less obvious stock market dynamics. For instance, you’ll likely have early access to local breaking news reports about the companies you’ve invested in – like if an upcoming policy could affect their profits, or there’s an impending boycott on their products.

Plus, investing in companies that trade in your local currency can save you the cost of currency conversion fees.

The drawbacks of investing locally

Investing in local companies also has downsides.

Sometimes the perception we form of a company based on our consumer experience can cloud our judgement about whether it’s a good investment.

For example, you might be tempted to invest in the luxury food retailer where you shop over the bargain grocery store that caters to the mass market. While the customer experience might be better at your preferred shop, a comparison of the two companies’ financials might tell a different story.

Secondly, as a consumer, you’re more likely to invest in consumer goods companies. But investing in companies that all operate in the same sector can introduce risk to your portfolio.

Example

Say you invest in two huge local clothing retailers. If there’s a textile shortage due to global shipping constraints, both retailers are likely to suffer as a result. That means two of your holdings would take a knock, impacting a larger proportion of your overall portfolio. However, if you’d invested in one clothing retailer and one local textile manufacturing company, the odds of both companies being impacted at the same time are reduced.

Finally, by investing locally you also introduce a degree of geographical concentration – especially if you invest in companies that only operate in your country. That’s because you earn your income in your local market, but so do they.

Should your country’s economy suffer huge setbacks, your job security and the performance of your portfolio could be at risk. And if all your money is tied up in your local economy, you can’t benefit from potential growth in other parts of the world.

Lesson summary

  • Investing locally is advantageous for new investors as they’re familiar with the market
  • Lifestyle investing is holding shares in companies offering products you consume
  • Local investments can help you avoid currency risk and conversion fees
  • The risks of investing locally are geographic concentration and personal bias about certain companies
Lesson complete