Topic: How To Invest

4 Steps on How to Make Good Investments for a Solid Stock Portfolio

Investors who want to know how to make good investments need to focus on five strategic components: investment style, compound interest, smart ETF picks, hidden assets, and stocks with a history of value

We advise investors to look for stocks that are likely to pay off if business and the stock market are good, but that won’t hurt them too much during those inevitable periods when business or the markets are bad.

As a conservative investor, there are five considerations in learning how to make good investments that build a portfolio you can feel comfortable with.

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1. How to make good investments: Become a “bottom-up” investor

We recommend sticking to our three-part Successful Investor approach. In addition to its bottom-up focus, it calls for diversification in the five economic sectors, and advises downplaying or avoiding stocks in the broker/media limelight.

As part of their portfolio diversification strategy, most investors should have investments in most, if not all, of these five sectors. The proper proportions for you depend on your temperament and circumstances.

For example, conservative or income-seeking investors may want to emphasize utilities and Canadian banks given these stocks generally have high and secure dividends.

More-aggressive investors might want to increase their portfolio weightings in Resources or Manufacturing stocks. For example, more-aggressive investors could consider holding as much as, say, 25% to 30% of their portfolios in Resources.

However, you’ll want to spread your Resource holdings out across oil and gas, metals and other Resources stocks for diversification and exposure to a number of areas.

If you diversify as we advise, you improve your chances of making money over long periods, no matter what happens in the market.

2. How to make good investments: Utilize proven strategies for compound interest

Compound interest—earning interest on interest—can have an enormous ballooning effect on the value of an investment over the long-term.

Compound interest can be considered the mother of all long-term investment strategies. This tip is especially important for young investors to learn. The benefits of this stock trading tip apply to both stock and fixed-return, interest-paying investments such as bonds. When you earn a return on past returns, 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.

To profit from this tip, you need to pay attention to steady drains on your capital, even seemingly small ones—like high brokerage commissions, for instance. If you’re losing (or missing out on a profit of) even 1% a year, it can have an enormous draining effect on your investments over a decade or two.

3. How to make good investments: Seek hidden assets early

There are many things to look for when evaluating a stock—and one of the most important is hidden assets.

The best time to find hidden assets is when they’re still hidden, long before the company begins taking steps to profit from them. Understanding and seeking out hidden assets while you’re evaluating a stock can add enormously to your profits in the course of an investing career. But you need patience to profit from them, because they can stay hidden for a long time after you buy.

Hidden assets can also cut your risk. Stocks with hidden assets are likely to hold up better than those whose assets are easier to spot, since they are the last stocks that experienced, successful investors sell. When times are good, on the other hand, stocks with hidden assets tend to do better than average. Good times give them opportunities to put their hidden assets to work.

4. How to make good investments: Look for dividend-paying stocks

Good dividend stocks are a valuable component of any sound investing portfolio.

Canadian dividend stocks are an attractive way to increase profit with the least amount of risk. Consider the security of those stocks given dividend records that, in many cases, go back several years, if not decades.  There’s also the potential for tax-advantaged capital gains on top of the dividend income.

Canadian dividend stocks are an important contributor to your long-term gains, and dividend-paying stocks tend to expose you to less risk than non-dividend-payers. That’s why the majority of your stocks should be dividend-payers at all times. As you get older and closer to retirement, you should raise the proportion of dividend-paying stocks in your portfolio, to cut risk and improve the stability of your investment results.

Bonus Tip:

Investors looking to add more foreign exposure can, in many cases, buy individual stocks traded on foreign exchanges. But, buying exchange-traded funds, or ETFs, instead can help them avoid an extra layer of risk and expense. Still, we think you’re better off with “traditional” ETFs. This traditional, passive style keeps turnover very low, and that in turn keeps trading costs for your ETF investments down.

Additionally, the best ETF investments have lower Management Expense Ratios (MERs). MERs are generally much lower on ETFs than on conventional mutual funds because most ETFs take a much simpler approach to investing. Instead of actively managing their portfolios, ETF providers invest so as to mirror the holdings and performance of a particular stock-market index.

Good investments come in a variety of forms. What’s a telltale sign of a promising stock?

How steep was your learning curve on how to make good investments?


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