Topic: Value Stocks

Use a risk-averse investment strategy to maximize your portfolio gains as well as safety

Following a sound risk-averse investment strategy will guide you to long-term investments in high-quality stocks.

Conservative investing is an example of a risk-averse investment strategy. Conservative investing is an investment strategy that focuses on lower-risk, predictable and stable businesses. This strategy typically involves the purchase of top blue-chip stocks and other lower-risk investments. Meanwhile, our conservative investment strategy will help you avoid danger.

In our view, your goal as an investor, particularly if you follow a conservative investing strategy like our Successful Investor approach, 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 with losses.

For conservative investing, focus on a risk-averse investment strategy with high-quality stocks that offer hidden value, and follow the guidelines of our Successful Investor philosophy:

  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, Consumer, 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.

Utilize these two additional components of a risk-averse investment strategy to maximize portfolio gains

Here are two additional facets of our portfolio investing philosophy. You may only get to apply them at market extremes, but they are crucial to strong long-term results.

Don’t buy aggressively when stock prices have soared and there’s a lot of speculation in the market. At times like that, you should steer your portfolio investing away from low-quality, speculative investments. More so than usual, it’s particularly important to resist any urge you may feel to buy on margin or to buy options.

Mind you, you shouldn’t stay out of the market simply because it seems high or speculative. A high market can keep going higher for years.


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Don’t sell indiscriminately when the market is down. Of course, it’s always a good idea as part of your portfolio investing to sell any low-quality stocks, regardless of the market outlook. At times, you’ll also want to sell formerly high-quality investments that have lost their direction and appear to be struggling against overwhelming headwinds. But you shouldn’t sell high-quality stocks just because their prices have dropped. Nor should you sell them just because they’ve gone out of investor favour. Well-established, but out-of-favour stocks can provide great opportunities for patient investors.

Practice caution by using a risk-averse investment strategy with new issues

With new issues, the best rule for conservative, risk-averse investors is to wait till they’ve gone through an industry setback, if not a full-blown recession. By then you’ll know if they’ve matured into high-quality stocks, or joined the ranks of played-out speculations.

New issues typically come to market when it’s a good time for insiders or the company to sell. That isn’t necessarily a good time for you to buy. Often, it’s a good time to stay out.

On those out-of-the ordinary occasions that a new issue comes to market when it’s a good time for you to buy, then you probably won’t be able to buy much if any, at least at the new-issue price. That’s because the underwriters know when they have a “hot new issue” in the pipeline—that is, one whose share price is likely to shoot up as soon as public trading begins. In that case, they reserve most of the shares available at the initial new-issue price for their biggest and best clients.

If you’re not in that favoured group, you’ll have to buy in the after-market, after prices have moved up and the favoured buyers are taking profits.

We look at a lot of new or recent new issues and mostly decline to get involved. Every now and then, we do recommend one, but without illusions. Sometimes these recommendations pay off, on occasion spectacularly. But they succeed with less regularity than our recommendations of well-established, profitable, dividend payers.

Compounding will help your personal wealth grow over the long-term

Compound interest is earning interest on interest. Over time, interest-paying investments will earn more and more money from the effects of compound interest.

Compounding applies 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 reinvested 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.

Compounding is what makes investing a worthwhile pursuit. At the same time, though, it’s very important to keep an eye on investments or expense fees that affect the amount of interest you earn. Even 1% a year can be a huge drain on your portfolio.

What steps do you take in order to manage the amount of risk you take on within your portfolio?

What is the biggest risk you’ve taken with your portfolio? What was the result?

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