Topic: Value Stocks

Use these simple strategies to find the best low-risk investments

low risk investments

For conservative investors looking to add low-risk investments to their portfolios in 2020, here’s how to find them

Low risk investments equate to safer investments. For safe investing, focus on investing in high-quality stocks that offer hidden value. As you know, we put a lot of stress on what we call “hidden assets”—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 their balance-sheet value (usually original cost minus depreciation). Under-used brand names are another good example. When they are developed in-house, they won’t show any balance-sheet value. Another key hidden asset—one of our favourites is research spending. Companies write off their research outlays in the year in which they spend the money, but benefits such as new or better products may only materialize years in the future.

The Profits from Hidden Value

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Canadian Value Stocks: How to Spot Undervalued Stocks Plus Our Top 4 Value Stock Picks and more.

Well-established companies are the key to profitable and low risk investments

Instead of moving between extremes of risk, we continue to think investors will profit most—and with the least risk—by buying shares of well-established companies with strong business prospects and strong positions in healthy industries. That generally serves to highlight low risk investments.

Following that strategy doesn’t mean there won’t be surprises that affect every company in a particular industry. But well-established, safety-conscious 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.

You can get our advice on investment issues, plus buy/sell/hold advice on stocks you may be considering buying in our Successful Investor newsletter.

Be skeptical of companies that mainly grow through acquisitions when seeking low risk investments

Making acquisitions can speed up a company’s growth, but it also adds risk that can undermine a conservative, safe investing approach. Great acquisitions are rare finds. Many acquisitions come with hidden problems or risks, or they turn out to have been over-priced.

Despite the risks, some acquisitions turn out hugely profitable. So, your safe investing strategy shouldn’t automatically discount companies that have grown through acquisitions. Just keep the risks in mind, and avoid companies that seem unaware of them.

Take a broad view when looking for low risk investments

When we’re looking for the best investments to recommend in our newsletters and investment services, we start by putting all the important information we know about a company into perspective.

But things are never quite so simple, even with low risk investments. Your stock pick’s latest earnings may reflect unusually favourable or unfavourable conditions. This can make the company look safer or riskier than it really is. In addition, the company may put the funds it borrowed to immediate profitable use, increasing its earnings and its ability to pay interest. It may plan to sell assets to reduce debt, or cut costs to increase earnings.

In the end, there are many ways to try to put the facts about a company into perspective. None are perfect, since all involve a mental balancing act between high and low estimates, history and the future, and faith versus skepticism.

Our goal is to put the information in a form that lets us weed out the extremes—excessively overvalued stocks, or those that are suspiciously cheap. In the long run, investors make most of their profits in investments that offer good value and an attractive long-term outlook. That ensures a place for low risk investments.

Use our three-part strategy to find low risk investments

No matter what kind of stocks you invest in, you should take care to spread your money out across most if not all of the five main economic sectors: Finance, Utilities, Consumer, Resources & Commodities, and Manufacturing & Industry.

By diversifying across most if not all of the five sectors, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or investor fashion.

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.

Our three-part Successful Investor strategy also applies to low risk investments:

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

Bonus Tip: A big idea may lead investors astray

Many investors instinctively try to spot these big ideas. Most instead get sidetracked by ideas that are eye-catching but transitory. Rather than give you a clue to the market’s direction, these transitory ideas may distract you from what’s really going on. For example, when markets rise for a long time, some investors lose the habit of trying to spot the big ideas that are driving the rise. Instead they switch to searching for what you might call “The One Big Signal” that tells you it’s time to sell. You’re especially prone to falling into this trap if you’ve stayed out of the market during a long rise in prices

Do you focus on low risk investments for your portfolio? How do you find these investments? Share your thoughts with us in the comments.

This post was originally published in 2015 and is regularly updated.


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