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A year ago, Pat McKeough was asked to contribute his “best financial tip” to the Blog for Financial Literacy. It proved to be one of our most popular daily posts of 2012. Thanksgiving Monday seems like a good time to re-visit this essential piece of investment advice from Pat.
“My Best Financial Tip” is to take a sound fundamental approach to investing in stocks. That’s especially true at a time like today when interest rates are near historic lows and bonds and other fixed income investments offer sparse returns.
So to show the best long-term results, we think you should stick with our three-part TSI Network investing program (but keep in mind that this approach is a starting point to success in investing, not a step-by-step blueprint):
1. Invest mainly in well-established companies, with a history of rising sales if not earnings and dividends.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities.
3. Downplay or avoid stocks in the broker/media limelight. When stocks spend time in the limelight, they tend to become over-priced, and this leaves them vulnerable to a sharp downturn on any hint of bad news. Instead, look for stocks with hidden value that are less widely recognized as attractive investments.
Following these three key rules will set you off on the right track. But you still need to make a number of assessments and judgments that will help you choose among the many attractive investments that are available at any given time.
For instance, you’ll want to take care to diversify geographically. One of the worst things you can do is invest so that your portfolio would suffer a great deal due to a localized downturn in any one city, state or province. Ideally, your portfolio should give you exposure to much of the North American economy, plus substantial international exposure, if only through North American multinationals.
It is also critically important to develop a clear idea of how much risk you are willing to accept, through good times and bad. For example, some investors become more aggressive as the market rises, and more conservative as the market falls. The problem here is that all market trends, up or down, eventually reach a turning point. If you take on more risk as the market rises, you’ll wind up owning your riskiest portfolio just when the market is near a peak. That’s when risky stocks can do their greatest harm to your net worth.
Likewise, if you get more conservative as the market falls, you’ll wind up owning your safest portfolio just when the market is ready to rise, and that’s when you can afford to take a little more risk. In fact, some investors have a tendency to sell portions of their stocks as the market falls. Taken to extremes, this may lead you to sell all your stocks on the day the market hits bottom.
Our 3-part TSI Network approach to stocks has served our readers and portfolio-management clients very well over the years. Investors who follow this strategy can expect to generate positive returns—and avoid big losses, which is just as important for your long-term investment success.
COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members
How do you react when the market goes into a downward spiral? Do you hold your stocks? Do you sell some stocks? Do you buy stocks whose shares are down? Have you changed your approach to market downturns over the years?
Note: This article was initially published on November 15, 20127 Comments
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