Why you should be investing in what you know in 2021
Famous Fidelity investor Peter Lynch is known for his philosophy, "invest in what you know".
The idea is that even if you're not a finance expert, you're likely to be an expert in something, and you're probably able to make smart investment decisions in that area of expertise.
For example, if you work as a cosmetic surgeon and you notice a breakthrough new cosmetic technology that is taking the industry by storm, you might consider buying that company's stock.
As a cosmetic surgeon (or whatever your specialty may be), you are uniquely positioned to spot companies that are poised to grow in your own industry. And if you buy their stock, you could profit significantly before others catch on to the opportunity.
While not everyone is an expert in an entire field or industry, this notion of investing in your passions is one that many of the world's best investors follow. One of the most renowned investors, Warren Buffett chose to invest in Coca-Cola simply because drinking Coke made him happy.
For some investors, it may not be as simple as wanting to invest in a company because they like a certain soft drink - instead, it may be around a passion that they hold near and dear.
Take gaming for example: when the new Sony PlayStation 5 was released this year it sold out almost instantly due to unprecedented demand. Investors who are avid gamers would have been across the company's latest updates and news, and may have even purchased stocks to capitalise on its success.
While some investors invest in their hobbies, others prefer to invest in household names they know and trust. For instance, this week many Australian investors were waiting eagerly for Airbnb's IPO and listing on the NASDAQ stock exchange.
Why? Because Airbnb is a well-known sharing economy platform with a network of more than four million hosts listing private rooms, apartments and villas for rent, in more than 220 countries and territories around the world. A high percentage of Australians know and trust Airbnb for affordable accommodation, with the term Airbnb becoming a verb among travellers who opt for the experience of living like a local in places they visit, rather than staying in hotels.
Taking it one step further, investors who are passionate about the travel industry would also be clued up about Airbnb's experience during the global pandemic, as well as its expected growth and rebound as the world starts to move forward with the coronavirus vaccine, and the option for international travel becomes more realistic.
While many Australians enjoy investing in their favourite brands like Netflix or Amazon because it makes their investment journey more rewarding, it is also important they understand the performance of stocks before going all-in.
So how do you invest responsibly in your favourite brands?
1. Do your research and read the news
Understand how the industry of your favourite company is performing. Is it booming? Or is it close to going bust?
2. Dig deeper
Find the company's earnings reports or balance sheets to determine where the opportunities lie. Does the company have a sketchy past? Or is it sitting in the perfect position to grow substantially? What are its growth projections like?
3. Understand market volatility
It is important to understand what market volatility is, and how it will affect an industry. Is it directly affected by the coronavirus crisis? Or will it thrive?
4. Adopt a long-term investment strategy
If you're chopping and changing your investments frequently, it's likely you won't give your favourite company a chance to achieve its potential, meaning you could miss out on good profits.
5. Find a platform that offers zero-commission and fractional stocks
Finally, find an investment platform that offers commission-free and/or fractional stocks for your favourite companies. Some platforms allow you to invest in stocks for as little as USD$50, by owning a fraction of a company that would have generally cost upwards of $500 for the full stock.