4 stock market research tips for safe and profitable investing

We’ve long recommended these 4 stock market research tips in our newsletters and investment services. They can help you cut risk — and increase profits — in your stock portfolio.

(Our special report, “Canadian Stock Market Basics: How to Trade Stocks and Make Good Investments in Canada,” is full of safe investing strategies that you can easily put into practice right away. Click here to download your copy today.)

1. Look beyond financial indicators: When they first set out to formulate an investment strategy, many investors decide to focus their stock market research on a handful of measures. For instance, they may want to see a p/e ratio (the ratio of a stock’s price to its per-share earnings) below 15.0, say, along with an earnings growth rate of 20% or more a year, and perhaps a 2% dividend yield.

This approach worked a lot better in the pre-computer age, when investing was more labour-intensive. Few people wanted to dig through old newspapers, annual reports and other material to get at the data. So more gems were left to be found by those willing to do the work.

Today, if you find a stock with this (or any comparable) combination of favourable ratios, it probably comes with some more-or-less hidden drawback not covered by your system. Instead of steering you away from investments that you don’t understand, or that harbour hidden risk, this system will steer you toward them.

2. Think like a portfolio manager: As part of their stock market research, portfolio managers gather information from companies, industry studies and other sources. A good portfolio manager then tries to build their client a portfolio that makes money if things go well, but won’t lose too much if the opinions turn out to be faulty, as often happens.

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We do our own stock market research for our newsletters and investment services, and we apply it from a portfolio manager’s perspective. That’s why we advise sticking to well-established companies; they tend to hold on to more value when things go wrong, or at least recover eventually.

Bad times usually hit some market segments much more severely than others. That’s why we advise spreading your money out across the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities.

3. Hold a reasonable portion of your portfolio in U.S. stocks: We continue to recommend that Canadian investors diversify part of their portfolio (up to 30%, say) in well-established U.S. stocks. That’s because the U.S. market features major multinational opportunities that simply aren’t available anywhere else. As well, many U.S. firms are unique world leaders.

Moreover, with the Canadian dollar now hovering near parity with the U.S. dollar, there’s never been a better time to add high-quality U.S. stocks to your portfolio. If you’re a conservative investor, you could choose from the 50 companies we recommend in our Wall Street Stock Forecaster newsletter’s Conservative Growth Portfolio.

4. Give your investments time to pay off: Resist the ever-present urge to buy and sell. A sound portfolio, built through careful research, needs surprisingly few changes over the years. Trading less frequently is a good thing, because it gives you fewer occasions to make costly mistakes.

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