Topic: Growth Stocks

A Successful Investing Plan Should Focus on High-quality Stocks and Diversification

investing plan

Your investing plan can change as often as you need it to, but should zero in on high-quality stocks and diversification

One of the most common investment platitudes you’ll ever hear is that investors should, “have a plan (or system) and stick to it.” This is good advice if your alternative is to invest without any sort of plan—that is, to invest at random or do something different every time you make an investment decision. However, many investment plans in use today are not worth sticking with.

Any investing plan should always focus on investment quality first, especially when looking for growth stocks that have the potential for higher returns.

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Why an investing plan or system can be overrated

When they first set out to formulate an investing plan, many investors determine that they want to base investment decisions on a handful of financial or investment measures. For instance, they may want to see a p/e ratio (the ratio of a stock’s per-share price to its per-share earnings) below 15.0, say, along with an earnings growth rate of 20% or more annually, and perhaps a 2% dividend yield.

This approach worked a lot better in the pre-computer age, when investing was far more labour-intensive. Few people wanted to dig through piles of 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.

Something like that happens with momentum-based investing, which involves buying stocks that are going up, particularly if they are rising in response to earnings reports that beat forecasts. Criteria like these are easy to track electronically, so momentum favourites tend to get over-priced quickly. However, when a momentum favourite reports an unexpected earnings downturn or warning, it can drop 25% to 50% in a heartbeat.

Other kinds of systems or investing plans aim to avoid risk by buying put options to give you a way to avoid losses on your holdings, or using stop-loss orders to sell falling stocks before they drop too far. Plans like these are sure-fire ways to generate commission income for your broker. They do cut risk substantially, but they are even more effective in cutting profit. In general, they leave you with meagre returns at best.

The 7 characteristics of a growth investing strategy

Among the considerations that go into a successful growth investing plan, many investors overlook a number of important factors that can considerably lower their risk.

In the end, there’s no such thing as risk-free investing. The tips below for lowering your growth investing strategy risk have long been part of the advice we give you in our investment services and newsletters, including our flagship publication, The Successful Investor.

  1. Don’t overindulge in aggressive investments.
  2. Be skeptical of companies that mainly grow through acquisitions.
  3. Keep stock market trends in perspective.
  4. Balance your cyclical risk.
  5. Keep an eye out on a growth stock’s debt.
  6. Look for growth stocks that have ownership of strong brand names and an impeccable reputation.
  7. The best growth stocks should have the ability to profit from secular trends.

What we like in an investing plan: High-quality and diversification

The best investment plans or systems revolve around choosing high-quality investments and diversifying your holdings.

Remember to spread your portfolio out across most if not all of the five main economic sectors: Resources; Manufacturing; Finance; Utilities; and Consumer. That way, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or changes in investor fashion.

By diversifying across the sectors, you also increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average. These stocks come along every year. By nature, their appearance is unpredictable; if you could routinely spot them ahead of time, you’d quickly acquire a large proportion of all the money in the world, but nobody ever does that.

Our three-pronged program takes that general description a little further. In addition to spreading your investment money out across most if not all of the five economic sectors, we advise you to invest mainly in well-established companies, and focus on companies that are outside the broker/media limelight.

In what ways has your investing plan or strategy evolved during your investment career?

What stock investment ratio has remained a key part of your strategy?

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