diversification

The right number of stocks for you to own depends, in part, on where you are in your investing career. Most people have only modest amounts of money to invest when they’re starting out. Even so, it generally pays to invest at least several thousand dollars at a time, even if this means you can only buy a handful of stocks. Otherwise, your broker’s minimum commission will work out to too high a percentage of your investment on each trade. Initially, you should aim to invest in a minimum of four or five stocks — one from each of most, if not all, of the five main economic sectors. But you can buy them one at a time, or over a period of months or even years, rather than all at once. After that, you can gradually add new names to your portfolio as funds become available, taking care to spread your holdings out as we advise....

Economics questions are everywhere these days. Do we face a double-dip recession? Is the economy headed for the proverbial “seven lean years”? Should Obama launch another stimulus package? This brings to mind a famous quote from Peter Lynch, world champion mutual-fund manager of the 1980s and 1990s: “If you spend a dozen minutes a year worrying about the economy, you’ve wasted 10 minutes.” Lynch’s point is heresy to economists, but gospel to successful investors....

For years I’ve advised our readers to resist the temptation to invest in emerging markets. I felt you could get all the global diversification you need with a portfolio of 75% Canadian stocks and 25% U.S. stocks. Of course, I advised sticking to our three-part philosophy: invest mainly in well-established companies, spread your money out across the five main sectors, and downplay stocks in the broker/PR limelight. If you want more foreign or emerging markets exposure, I advised adding a closed-end fund or two to your portfolio....

Investing outside of Canada and the U.S. can expose you to more volatility and risk. The sharp downturn in many foreign markets during the global recession proves this. But there are still countries and regions that offer lots of growth potential and opportunities for diversification. We still think that mutual funds, rather than individual stocks, are the best way for most investors to access these areas. And you can cut your costs by buying closed-end funds. Below are four foreign closed-end funds that trade on the New York exchange at discounts to their net asset values. All have risen lately, but we still see them as buys for aggressive investors....

Enbridge Income Fund, $11.63, symbol ENF.UN on Toronto (Units outstanding: 34.6 million; Market cap: $403.3 million), holds a 50% interest in the Canadian portion of the Alliance Pipeline, and owns 100% of the Saskatchewan System. The Saskatchewan System operates crude-oil and liquids pipelines, including the Saskatchewan gathering, Westspur, Weyburn and Virden pipeline systems. The Alliance Pipeline, which went into operation in late 2000, is a 36-inch diameter pipeline with a daily capacity of 1.3 billion cubic feet of natural gas. It runs for 3,000 kilometres, from Fort St. John, British Columbia, to Chicago, Illinois. Alliance uses technology that makes it more efficient than many other pipelines. Aside from pipelines, Enbridge Income Fund holds a number of “green power” assets. These include a 50% interest in NRGreen Power Limited Partnership, which operates a waste heat recovery plant at Kerrobert, Saskatchewan. The plant converts exhaust heat from Alliance Pipeline’s natural-gas compressor station into electricity. The fund also owns a 50% interest in the SunBridge wind project in Saskatchewan, and a 33.3% interest in the Magrath and Chin Chute wind projects in southern Alberta....

Over the years, we’ve met a number of investors who favour investing in stocks only when economic and financial conditions seem good, if not ideal. If these investors hear talk of a drawn-out recession or rising interest rates, for example, they are inclined to stay out of the market, or get out if they’re in. In contrast, when they think conditions are ripe, these same investors are relatively casual about what they buy. They readily accept recommendations from brokers, or they buy stocks that are spotlighted by public-relations firms. They give dicey insiders the benefit of the doubt. You might say these investors are highly sensitive to stock market timing risk, but relatively insensitive to investment-quality risk. This is pretty much the opposite of our approach to investing....

A: We feel most mutual-fund investors should own no more than five funds. When you own a larger number of funds, you increase the risk of over-diversification, or that your portfolio will produce a return that matches the market, minus the 2% to 3% cost of fund management fees and expenses. AIC Canadian Focused Fund mostly holds high-quality large-capitalization Canadian stocks. The fund is okay to hold. Note that it holds a high 29.5% of its assets in cash. That market-timing strategy could cause it to miss out on a market rise. Altamira Equity is not one of our favourites, but it’s okay to hold as a Canadian stock fund....

MANULIFE FINANCIAL $20.19 (Toronto symbol MFC; Shares outstanding: 1.6 billion; Market cap: $32.5 billion; SI Rating: Above Average) sells life and other forms of insurance, as well as mutual funds and investment-management services. It operates in 19 countries and territories worldwide, including the U.S. and Asia. Manulife reported a loss of $1.1 billion, or $0.67 a share, in the three months ended March 31, 2009, compared to a gain of $869 million, or $0.57 a share, a year earlier. Excluding one-time charges, it would have earned $803 million, or $0.50 a share, in the latest quarter. The loss was largely caused by stock-market declines. Manulife also devoted $1.1 billion to strengthening its reserve for segregated-fund guarantees. This is the OSC’s main focus. The OSC may find that Manulife should have anticipated that the big drop in stock markets late last year would hurt its ability to meet those guarantees. Manulife subsequently issued debt and shares to boost reserves for those contracts, which pushed down its stock price. Either way, any OSC ruling shouldn’t hurt Manulife’s positive outlook....

Manulife shares dropped 14% recently after the Ontario Securities Commission began looking into whether it fully informed its shareholders late last year of the business risks of a market downturn. MANULIFE FINANCIAL $20.19 (Toronto symbol MFC; Shares outstanding: 1.6 billion; Market cap: $32.5 billion; SI Rating: Above Average) sells life and other forms of insurance, as well as mutual funds and investment-management services. It operates in 19 countries and territories worldwide, including the U.S. and Asia. Manulife reported a loss of $1.1 billion, or $0.67 a share, in the three months ended March 31, 2009, compared to a gain of $869 million, or $0.57 a share, a year earlier. Excluding one-time charges, it would have earned $803 million, or $0.50 a share, in the latest quarter....

A stock with a high corporate profile may provide investors with a feeling of security, but it doesn’t pay them any dividends. Instead, owning a lot of in-the-limelight stocks can work against safe investing. Lots of smart people work in the public relations and the brokerage business. They do a highly effective job of publicizing and promoting their clients’ stocks. Many stocks in the broker/public relations limelight go up more-or-less steadily for years at a time. But when they come down, they can fall much further than you ever thought possible. That’s why it’s a mistake to stuff your portfolio full of them. On the other hand, at any given time, lots of prosperous, well-established companies are out of investor fashion. Some of the biggest profits you ever make will come from buying these stocks before they find their way into the limelight....