It is important to note that some types of investments provide more security than others. Investors seeking safer investment options should look for well-established companies with hidden assets among other key characteristics.
Well-established companies are the key to profitable and low-risk investing. 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’s not to say that there won’t be surprises that affect every company in a particular industry. But safer investment options include well-established, safety-conscious stocks that have the asset size and financial clout to weather market downturns or changing industry conditions. Sound balance sheets and strong cash flow also strengthen their protection.
Blue chip stocks are safer investment options because they come with a history of success
The best blue chips offer both capital gains growth potential and regular dividend income. The dividend yield is certainly one of the most concrete indicators of a sound investment. We pay especially close attention to that dividend yield when we select stocks to recommend in our investment newsletters.
We feel most investors should hold the largest part of their investment portfolios in securities from blue chip companies. Ideally, these stocks should offer good “value”—that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Ideally, they should also have above-average growth prospects in expanding markets.
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Safer investment options include low-risk investments with hidden assets
We 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.
Safety begins with lower risk. For safer 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, while the benefits, such as new or better products, may only materialize years in the future.
Safer investment options: Value stocks can lower your portfolio’s volatility
Most successful investors hold some growth stocks and some value stocks at any given time, depending on where they see the best opportunities. Value stocks are stocks trading lower than their fundamentals suggest. They are perceived as undervalued and have the potential to rise.
Many technology stocks started out as growth picks, but have started to transition into value stocks. Growth stocks and value stocks can make a winning combination. A growth stock can be a top performer when the company is growing. However, a single quarter of bad earnings can send it into a deep, but often temporary, slide. Value stocks can test your patience by moving sluggishly for months, if not years. But they can make up for it by rising sharply when investors discover their true value.
If you want to pick safer investment options, then you need to think like a portfolio manager
As part of their stock market research, portfolio managers gather information from companies, industry studies and other sources. A good portfolio manager then tries to build the client a portfolio that makes money if things go well, but won’t lose too much if the opinions turn out to be faulty, as often happens.
We do our own stock market research for our newsletters and investment services, and we apply it from a portfolio manager’s perspective. That’s why we advise sticking to well-established companies; they tend to hold on to more value when things go wrong, or at least tend to recover more quickly.
Bad times usually hit some market segments much more severely than others. That’s why we advise spreading your money out across most if not all of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities.
Bonus: Putting too much into aggressive investing does not lead to safer investment options
Aggressive stocks can give you bigger gains than more conservative stocks. But they also expose you to a greater risk of loss. That’s why we recommend limiting your aggressive holdings to a smaller part of your overall portfolio.
Ultimately, the percentage of your portfolio that should be held in either conservative or aggressive investments depends on your personal circumstances and risk tolerance—and your own growth investing strategy. An investor with a longer time horizon or no immediate need for current income from a portfolio can invest more money in aggressive stocks.
What strategy have you used in the past to find the safest investments for your portfolio?
How does a strong stock market affect your risk tolerance level?
