3 common mistakes investors make when selecting Canadian stock picks

Here are three common mistakes many investors make when selecting Canadian stock picks. All three can seriously hinder — or eliminate — your portfolio’s long-term profit potential.

1. Buying low-quality investments: Most of the bad deals in Canadian stock picks exhibit the usual tip-offs. For example, many lack a history of earnings or dividends. They may also spend way too much time publicizing themselves, and too little time building their businesses.

To increase your stock market returns, we feel you should invest mainly in high-quality, dividend-paying companies. We also feel you should diversify by spreading your money out across the five main economic sectors (Resources & Commodities, Finance, Manufacturing & Industry, Utilities and Consumer).

However, diversification only adds value if you apply it to well-established companies. Diversifying a penny stock portfolio is like diversifying a portfolio of lottery tickets. If you buy a lot of speculative stocks, your occasional winner may not be enough to offset your many losses.

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2. Buying too many stocks in the broker/public-relations limelight: These stocks tend to develop exaggerated expectations, especially from inexperienced investors. That can push their share prices up to unreasonable highs.

But if these stocks fail to live up to those exaggerated expectations, stock declines can be brutal. That’s why it’s a mistake to let in-the-limelight stocks make up too big a proportion of your portfolio.

3. Focusing too heavily on Dividend Reinvestment Plans (DRIPs): Participating in a Dividend Reinvestment Plan is a good idea if you only use it to cut commission costs on Canadian stock picks you would have bought anyway. But confining your investments to stocks that offer DRIPs is a terrible idea. Some of these stocks are bad investments. You can lose a lot more on capital losses than you can save on commissions — now especially.

DRIPs offer much less advantage now than they did in, say, the 1980s, when brokers charged 2% or more to buy stocks. Today, thanks to the growth of discount brokerage and Internet competition, you can buy stocks for a commission cost of 0.5% or less. In addition, many companies that offer DRIPs have done away with the 5% discounts that used to be common. Now you pay full price to buy through most DRIPs. But DRIPs are still a handy way to reinvest small dividend payments.

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