Our best investment advice for investors who want to be successful in the market is to use sound judgment and seek dividend-paying stocks

In our view, your goal as an investor, particularly if you follow a conservative investing strategy like the one we recommend, is to make an attractive return on your investments over a period of years or decades. Failure means making bad investments that leave you with meagre profits or even losses.

The seven Successful Investor tips below should help you maximize your portfolio returns.

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Best investment advice, tip #1: Always try to apply your judgment, but don’t overrate it.

If you have been successfully investing for a number of years, your judgment has value. You should listen to it, if it aligns with our Successful Investor approach. Don’t wait for your broker or the cable news commentators to confirm it. But don’t go overboard on your stock purchases. Something we’ve learned over the years is that no matter how sure we are that a stock is a winner, we can still be dead wrong from time to time.

There are no sure things in the stock market. That’s why we always advise you to keep any one stock you buy within reasonable bounds (5% or less of your portfolio, say.)

Best investment advice, tip #2: Seek dividends in your investments.

If you’re new to investing, one tip we share often is to invest in companies that have been paying a dividend for five or more years. Dividends are typically cash payouts that serve as a way for companies to share the wealth they’ve accumulated. These payouts are drawn from earnings and cash flow and paid to the shareholders of the company. Typically these dividends are paid quarterly, although they may be paid annually or even monthly as well. Canadian citizens who own shares in Canadian stocks that pay dividends will also benefit from a special tax break.

Best investment advice, tip #3: Always ask yourself, “What can go wrong with this investment?”

What upcoming event/technology/political trend/competitive threat could derail its profitability? In other words, don’t fall in love with a stock just because it has a great story or track record.

When a company’s profits have been rising for years, its stock price will most always be expensive in relation to per-share profit. If something goes wrong and profit starts to erode or, worse, turns into loss, the stock can go through a devastating drop. That’s what keeps us out of most broker favourites (which brokers themselves sometimes refer to as the “flavour of the month”). Too much enthusiasm for a current market favourite leads investors to ignore its risks and price it as if those risks don’t exist.

Best investment advice, tip #4: Always remember that high profits attract competition.

This is related to rule #3. When a company is making a lot of money, you can be sure that other companies are making plans to enter its market with a competitive product that is slightly cheaper, or better, or more effectively marketed. Unless demand is exploding, this is bound to limit sales growth and depress profit margins.

That’s why you need to diversify your Successful Investor portfolio between stocks that are already making big profits and those that seem headed for profit gains.

Best investment advice, tip #5: Understand compounding; it’s how your personal wealth grows.

Compound interest is earning interest on interest. Over time, your long-term investments will earn more and more money from the effects of compound interest. Compound interest is what makes investing a worthwhile pursuit.

Compound interest is applied to equity investments like stocks, as well as to fixed-return, interest-paying investments like bonds. When you earn a return on past investment returns (including compounding dividends on dividends), the value of your investment can multiply. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate.

It’s also very important to keep an eye on investments or expensive fees that affect the amount of interest you earn. Even 1% a year can be huge drain on your portfolio.

Best investment advice, tip #6: 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.

Best investment advice, tip #7: Diversify your Successful Investor portfolio

Spread your money out across most, if not all, of the five main economic sectors (Finance, Utilities, Manufacturing, Resources, and the Consumer sector). The proportions should depend on your objectives and the risk you can accept. The Canadian Finance and Utilities sectors involve below-average risk. Manufacturing and Resources tend to be riskier, and the Consumer sector is in the middle.

What is some of the best and worst investing advice you have received?

If you could share one piece of investing advice with new investors, what would it be?