Build a conservative stock portfolio for maximum gains by following these key tips

Develop a successful conservative stock portfolio by including high-quality blue-chip stocks

All in all, we think investors will profit most—and with the least risk—by building a conservative stock portfolio comprised of shares from well-established, dividend-paying blue-chip stocks with strong growth prospects.

And at TSI Network, we feel that stocks that have been paying dividends for over 10 years are some of the safest investments you can make. Dividends are a sign of quality and a company’s financial health. Types of stocks that we consider to be safer investments include Canadian banks and utilities.

True Blue Chips pay off

Learn everything you need to know in this FREE Special Report from The Successful Investor.
Canadian Blue Chip Stocks: Bank of Nova Scotia Stock, CP Rail Stock, CN Rail Stock and more.

Understand compounding is an important part of building wealth with your conservative stock portfolio over time

Compound interest is earning interest on interest. Over time, your long-term fixed-income investments will earn more and more money from the effects of compound interest. At the same time, the magic of compounding can also be applied  to dividend-paying equity investments like stocks—not just to fixed-return, interest-paying investments like bonds. When you earn a return on past investment returns (including dividends), the value of your investment can multiply quickly. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate. Note, though, that it’s also very important to keep an eye on expense fees that affect the amount of interest or dividends you earn. Even 1% a year can be a huge drain on your portfolio.

Add lower-risk investments to your conservative stock portfolio for safer holdings

Lower-risk investments equate to safer investments. For conservative investing, focus on investing in high-quality stocks that at the same time offer hidden value.

These assets include long-time real estate holdings that are worth much more than their balance-sheet value (usually original cost minus depreciation). Under-used brand names are another good example. When they are developed in-house, they won’t show any balance-sheet value. Another key hidden asset—and one of our favourites—is research spending. Companies write off their research outlays in the year in which they spend the money, but benefits such as new or better products may only materialize years in the future.

Furthermore, take a broad view when looking for lower risk investments. When we’re looking for the best investments to recommend in our newsletters and investment services, we start by putting all the important information we know about a company into perspective. But things are never quite so simple. Your stock pick’s latest earnings may reflect unusually favourable or unfavourable conditions. This can make the company look safer or riskier than it really is. In addition, the company may put funds it borrows to immediate profitable use, increasing its earnings and its ability to pay interest. It may plan to sell assets to reduce debt, or cut costs to increase earnings.

ETFs can play a role in your conservative stock portfolio

We still feel that investors will profit the most with a well-balanced portfolio of high-quality individual stocks, but ETFs can also play a role in a portfolio.

The best conservative ETFs represent a low-cost, tax-efficient way for investors to make money over the long term. They offer well-diversified portfolios with exceptionally low management fees.

However, we think you should stick with “traditional” ETFs. Traditional ETFs follow the lead of whoever sponsors the index they are trying to mimic. While those index sponsors do from time to time change the stocks that make up the index, the ETF’s managers change their portfolio holdings to reflect those changes.

However, when an investment product faces booming demand as ETFs do today, investment companies try to expand sales by creating “new” versions of the underlying formula.

These “new” ETFs use a conventional stock-market index as a base, but add their own refinements. These refinements are tailored to current investor preferences or prejudices. That’s distinctly different from traditional ETFs, which, as mentioned, simply aim to mimic an index. These newer, theme varieties may attract attention—and sales—but they frequently carry higher management expense ratios (MERs).

Understand aggressive stocks and the role they can play in a portfolio

Aggressive stocks typically don’t have a secure hold on a growing market or at least the stable clientele that conservative stocks have. When something goes wrong with aggressive investments, you’ll very likely lose a lot more than with conservative stocks.

We recommend limiting your aggressive holdings to a smaller part of your overall portfolio. This is because, as mentioned, aggressive stocks expose you to a greater risk of loss. An investor with a longer time horizon or without the need for current income from a portfolio can invest more money in aggressive stocks.

Use our three-part Successful Investor approach to build a strong, diversified conservative portfolio

  1. Invest mainly in well-established, dividend-paying companies. Ideally, some of your picks should also have hidden assets. That is, assets that many investors disregard or fail to appreciate.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, the Consumer sector, Finance, and Utilities.
  3. Downplay or avoid stocks in the broker/media limelight, where a modest business setback can set off a deep, sudden and sometimes permanent drop in the stock.

What kind of economic climate would move you away from a conservative stock portfolio and towards more aggressive investments?


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