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With only a few weeks left in 2024, many investors are thinking and planning for the coming year. Given the valuation of many UK stocks compared to their US peers, I think there will be a lot of discussion about where to invest.
However as someone who has been involved in the stock market for many years, there are a few important mistakes to avoid.
Do not confuse an index with an individual stock
I FTSE 100 hit hard earlier this year. Next year, I believe the index will trade even higher, perhaps above 9,000 points. Because of this, some investors may avoid buying FTSE 100 shares, arguing that it is too expensive or that buying something at the peak is not a smart move.
This thinking confuses index performance with stock performance. Even though the FTSE 100 may be higher, there is still value in each stock. It does not mean that all FTSE 100 stocks are high quality and overvalued.
So the mistake to avoid here is not investing because someone thinks the index is too valuable. With the right research, opportunities can always be found in good value stocks.
The problem with REITs
Some investors will look at UK real-estate investment trusts (REITs) as a cheap place to buy. They will mark the fact that in several cases, the net asset value (NAV) of the portfolio is higher than the share price. In some cases, this can be a 20%-40% discount.
For example, consider Schroder Real Estate Investment Trust (LSE: SREI). pays a dividend of 6.73%, the stock is up 10% over the past year. The share price is currently trading at a 19% discount to NAV. It last equalized NAV back in late 2016.
It is true that in the long run the share price should rise to the same level as the NAV. However this can take several years (actually many) to happen!
One of the reasons why this REIT is different is because real estate has fallen out of favor with investors over the past few years. The shift to flexible operations as the pandemic has caused some to sell real estate stocks, even if the value of the REIT portfolio has not been materially reduced.
Of course, the generous dividend yield is still attractive to income investors. The trust has increased its dividend per share for several years. But I feel it would be a mistake to consider this stock by simply expecting the share price rally back to NAV in 2025.
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice.
Looking at themes for 2024
Other areas of the market did very well in 2024. For example, the banking sector. However, not all themes will play the same way next year. Banks are likely to come under more pressure with interest rate cuts in countries such as the UK and US by 2025.
The rise of AI in 2024 is a theme that could continue next year. But the point is not to assume that because one sector did well last year that history will repeat itself in 2025.
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