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Topic: Wealth Management

This portfolio management strategy can help you avoid big losses

A key part of our three-part tsinetwork.ca portfolio management advice is to downplay stocks that are in the broker/public-relations limelight.

(The other two parts are to invest mainly in well-established, dividend-paying companies and spread your money across the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities.)

Portfolio management: Why “in the limelight” stocks are riskier than most investors think

It’s especially crucial to downplay stocks that are getting a lot of attention from brokers in the media. That’s because, in investing, familiarity can breed excessive feelings of comfort, security and performance.

Brokers get information from the media, investment journalists spend a lot of time talking to brokers, and company managers listen to both. A feedback loop can develop that spurs high expectations, derails criticism, and leads companies (and their investors) to make devastating mistakes.

You may get the feeling that these are can’t-miss investments, and you’re safe to follow a portfolio management strategy of adding them to your portfolio and forgetting them. That’s exactly the wrong thing to do with these stocks. Your “in-the-limelight” holdings are the ones you need to watch most closely.

Invest in your Financial Future for FREE

Learn everything you need to know in '9 Secrets of Successful Wealth Management' for FREE from The Successful Investor.

Secrets of Successful Wealth Management: 9 steps to the life you've always wanted, before and after retirement.

 I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

Broker/public-relations favourites can fall much more sharply than other stocks

Needless to say, lots of smart people work in the public relations and brokerage businesses. Many broker/public relations favourites go up more-or-less steadily for years at a time. But when they come down, they take a lot of people by surprise, and they can fall much further than you ever thought possible.

That’s why it’s a mistake to stuff your portfolio full of them. A high corporate profile may provide investors with a feeling of security, but it doesn’t pay them any dividends. Instead, in-the-limelight stocks trade at a premium.

Our portfolio management advice: Instead of familiarity, we think you should aim for investment quality and diversification. At any given time, lots of prosperous, well-established companies are out of investor fashion. Some of the biggest profits you ever make will come from buying these stocks before they find their way into the limelight.

Note that the broker/public-relations limelight can also create buying opportunities. When brokers and the media turn negative on an investment, they can ignore hidden value and stay negative for longer than they should. When that happens, it can give you the opportunity to add some good investments to your portfolio at bargain prices.

If you’re looking for authoritative advice on investment issues—including portfolio management—or fundamental analysis of investments you’re considering buying, you should join Pat McKeough’s Inner Circle. It’s Canada’s most exclusive investment group.

Inner Circle members always get clear, concise investment advice that’s 100% independent, and untainted by commissions or other undisclosed influences. We guarantee it. Click here to learn more.

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