Topic: How To Invest

How to invest: Tips for new (and established) investors

Positive everyday behaviours—not big ideas—are the keys to successful investing for beginners

Our advice to beginning investors is the same as it is for all investors: buy high-quality, mostly dividend paying stocks (or ETFs that hold these stocks) and evenly spread your investments over most if not all of the five main economic sectors (Resources, Manufacturing, Finance, Utilities and Consumer. But, new investors should also cultivate two important qualities: a healthy sense of skepticism and patience.

Successful investing for beginners: Cultivate key everyday behaviours—not big ideas

Investing success comes from making more right decisions than wrong ones over a long period of time.

Stock investing for beginners can be much more profitable with these tips that will help you cut risk and increase profits in your stock market portfolio. We’ve long recommended these tips:

  • Look beyond financial indicators
  • Think like a portfolio manager
  • Hold a reasonable portion of your portfolio in U.S. stocks
  • Give your investments time to pay off

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If you ask investors who have a few decades of successful investing behind them, few, if any, will credit their success to any one investment or investing technique. Instead, most will talk about the value of everyday behaviours like patience, consistency and a healthy sense of skepticism—in short, the kind of behaviours that bring success in all aspects of life, not just investing.

  • Approach all investments with a healthy sense of skepticism. This can help keep you out of fraudulent stocks that masquerade as high-quality stocks. It will also keep you out of legally operated, but poorly managed, companies that promise more than they can possibly deliver.
  • Losing patience can cause you to sell your best choices right before a big rise. All too often, investors buy a promising stock just as it enters a period of price stagnation. Even the best-performing stocks run into these unpredictable phases from time to time. They move mainly sideways in a wide range for months or years before their next big rise begins. (Stock brokers often refer to these stocks as “dead money.”)
  • Consistency is crucial. You can’t succeed by applying our three-part formula three years out of four. If you try to do that, you run a serious risk of abandoning the formula when risk is at a peak. That’s when our formula serves you best, and failing to adhere to a sound investing approach can do the greatest harm to your net worth.

Investing for beginners Tip #1: Hold mostly high-quality, dividend paying stocks or ETF funds that hold those stocks

We think investors will profit most — and with the least risk — by buying shares of well-established companies with strong business prospects. These are companies that have strong positions in a healthy industry. They also have strong management that will make the right moves to remain competitive in a changing marketplace.

A long-term record of dividends provides a measure of safety for investors. Dividends, after all, are much more stable than earnings. More important, dividends are impossible to fake — either the company has the cash to pay dividends or it doesn’t.

That’s not to say that there won’t be surprises that affect every company in a particular industry. But well-established stocks have the asset size and the financial clout — including sound balance sheets and strong cash flow — to weather market downturns or changing industry conditions.

Investing for beginners Tip #2: Keep your portfolio well-balanced among the five economic sectors

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, and nobody ever does that.

Investing for beginners Tip #3: Downplay or avoid stocks in the broker/media limelight

That’s because these stocks tend to develop exaggerated investor expectations – especially those of inexperienced investors. When these stocks fail to live up to those expectations, declines can be steep. Broker and media attention tends to build investor optimism and push these stocks up to relatively high prices. If the market weakens or if they run into internal difficulties, these stocks can drop sharply, so it’s a good idea to limit your exposure to them.

Investing for beginners Tip #4: Focusing on including stocks with hidden or little-noticed assets

These are assets that are easy to overlook, since their full value rarely appears on a company’s financial statements.

These assets include long-time real estate holdings that are worth much more than the balance-sheet value. Under-used brand names are another good example. Another key hidden asset — is research spending. Companies write off their research outlays in the year in which they spend the money, but benefits (if any) such as new or better products may only materialize years in the future.

Follow our three-part Successful Investor strategy

  • Invest mainly in well-established, dividend-paying companies;
  • Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
  • Downplay or avoid stocks in the broker/media limelight.

Have you used any of these tips for easy investments for beginners? Do you have additional tips to add? Share your thoughts with us in the comments.


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