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Secrets of Successful Wealth Management: 9 steps to the life you've always wanted, before and after retirement.

Topic: Wealth Management

Use these best investment research tools to guide you in building a well-balanced portfolio of high quality stocks

best investment research tools in building a well balanced portfolio

®Using our three-part Successful Investor approach, in addition to our other best investment research tools, will help you build a more stable, profitable portfolio

As we’ve said before, it’s a mistake to let predictions guide your investing, because they are not among the best investment research tools. It’s even worse, however, to base investment decisions on what you might call “compound predictions”—those that have two or more related parts that all have to pay off for you to win.

Most investment predictions fail for reasons like this. They tend to zero in on one or a few high-profile issues and play down or disregard other important matters that also have a role in the investment process.

Additionally, as new ideas stream into the market, more choices are available. This is hard on investors who focus on predictions because they have more ways to guess wrong with this new information.

Invest in your Financial Future for FREE

Learn everything you need to know in '9 Secrets of Successful Wealth Management' for FREE from The Successful Investor.

Secrets of Successful Wealth Management: 9 steps to the life you've always wanted, before and after retirement.

The best way around this problem is to quit making predictions. Forget about trying to pinpoint future events or developments. Everybody who tries often enough will wind up making some good guesses. However, no one can foresee the future.

Instead, take a close look at what you know about the current investment situation. Then, try to spot investments that seem to offer attractive opportunities under a variety of future conditions.

Some of your favourite choices will disappoint you—so will many of your predictions. But some of the investments you choose for the opportunity they offer will perform much better than you ever guessed, when you least expected it.

These four financial ratios are some of the best investment research tools for analyzing stocks

Price-earnings ratios (or p/e ratio): The p/e is the ratio of a stock’s market price to its per-share earnings. As a general rule, the lower the p/e, the better, and generally a p/e of less than 10 represents value.

Price-to-book-value ratios: The book value per share of a company is the value that the company’s books place on its assets, less all liabilities, divided by the number of shares outstanding. Book value per share gives you a rough idea of the stock’s asset value.

Price-cash flow ratios: Simply put, this is earnings without taking into account non-cash charges such as depreciation, depletion and the write-off of intangible assets over time. It’s actually a better measure of a company’s performance than earnings.

Debt-to-equity: When a company loses money, it still has to pay the interest and eventually repay the debt. A high ratio of debt to equity increases the risk that the company won’t survive a business slump.

Using a break-even analysis as one of the best investment research tools for making profitable decisions

A break-even analysis is basic arithmetic, but has significant value in analyzing potential gains—and losses—on stocks. For example, if you lose X% in the stock market, you’ll need X% to recover, or break even. An understanding of this relationship can help you stay out of poor-quality stocks where the risk of a big decline is high. For example:

  • If you lose 10%, you need an 11% gain to break even.
  • If you lose 20%, you need to make 25% to break even.
  • If you lose 40%, you need to make 66.6% to take you back to where you started.
  • If you lose 50%, you need a 100% gain to break even.

An 11% gain is relatively common; in fact, the market has gained nearly that much annually, on average, over the past 75 years or so. A 25% gain is a little harder to achieve. You need an above-average year to make that kind of return. Gains of 66.6% to 100% or more can take years. Even if you make enough money to regain your losses, however, that only brings you back to where you started.

Use charts to support your view a company

Chart reading is a useful tool, but it’s just one among many. Don’t look at a chart for a prediction of what’s going to happen. Instead, look to see if the pattern on the chart seems to support your view of the stock, based on its finances and other fundamentals. But remember that the stock market follows a multitude of factors to varying extents, and the most important or influential factors continually change.

It’s encouraging if your analysis and the chart seem to match. But sometimes they don’t. If a company looks promising, but its chart shows a lengthy falling trend, insiders may know something you don’t. That’s when you know you have to dig deeper, and perhaps wait until the situation clarifies itself.

Use our three-part Successful Investor approach, which stands atop the best investment research tools

  1. Hold mostly high-quality, dividend-paying stocks.
  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 stay out of stocks in the broker/media limelight.

What are your favourite tools for researching stocks?


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