Successful investors try to arrange their portfolios so that they more-or-less automatically tap into the profit and long-term growth that inevitably comes with well-established companies.
And now is a particularly good time to follow our Successful Investor investment approach. Our system of the most successful investment strategies has three key rules:
Rule #1: Invest mainly in well-established, profitable, dividend-paying stocks.
Our first rule in the most successful investment strategies will help you stay out of high-risk, low-quality investments. These investments are always available, in good and bad markets. They come with hidden risks due to conflicts of interest and other negatives. Every year, they lead many inexperienced investors to substantial losses.
Recent standout losers include bitcoin and other cryptocurrencies; a disappointing crop of new issues (IPOs), which tend to come to market when it’s a good time for the new-issue company or its insiders to sell, but not a good time for you to buy; and slapped-together promotional stocks that hit the market thanks to the SPAC phenomenon, which offers a short cut to IPO status.
Rule #2: Spread your money out across most if not all of the five main economic sectors.
This is our key to successful diversification. The widely disparaged resource sector turned out to have some major winners last year, in Canadian oil and gas stocks. Nutrien Ltd., our top fertilizer recommendation, shot up in early 2022 as the Russian invaded Ukraine, which put a big dent in world grain supplies.
On the other hand, if you had disregarded resource stocks with the intention of doubling down on tech stocks, you might have wound up with excessive holdings in tech stocks just as they entered a plunge.
Rule # 3: Downplay or avoid stocks in the broker/media limelight.
We’ve recommended a handful of tech stocks and other broker/media favourites in the past few years, but we always advised against concentrating on them.
Rather than zero in on broker/media favourites, we prefer to apply our first and second rules. If you build a balanced, diversified portfolio of high-quality stocks, it’s hard to go too far wrong, even in a challenging year like 2022 that we’ve recently experienced.
Understanding successful investments
A successful investment is one that provides long-term gains for its investors. Profitability will mean different things to many investors. One key to making a successful investment is you need to disregard or at least downplay investment marketing messages.
This is especially true with new investment innovations. Investors need to be vigilant when looking at different types of investments because investment firms work hard on their marketing. They do this because it can attract customers and spur sales. But investment marketing can do damage when it makes an inherently risky investment look safe.
When it comes down to it, the four keys to investing successfully are:
- Don’t depend on luck to make money for you or to prevent losses.
- Be skeptical of the claims and recommendations of brokers, promoters or anybody else with a vested interest in a particular investment.
- Don’t do anything stupid.
- Win by not losing.
Understanding the difference between features and benefits is one of the keys to the most successful investment strategies
Highlighting a product’s features is a proven, low-cost marketing technique. It can speed up the buyer’s decision to buy. However, it can also lead potential buyers into making risky or poorly thought-out buying decisions.
This rule gets a lot of use in the marketing of fintech services, such as online brokerage services that claim they let you buy and sell stocks “commission-free.” The claim is perfectly true. That’s because the fintech passes the trade on to be executed by third-party/high speed brokers who buy and sell so fast and efficiently that they earn fees from other participants in the deal. The fintech gets a tiny fee for bringing in the client.
These fees come out of the pockets of the fintech’s clients: investors whose investments are being bought and sold. But instead of being identified as commissions, these fees raise the cost of a purchase, or reduce the proceeds of a sale. It’s obviously a benefit for the fintech. But it’s a feature at best for fintech clients who are just trying to save a few cents on brokerage commissions.
Use our three-part Successful Investor approach, one of the most successful investment Strategies
- Hold mostly high-quality, dividend-paying stocks.
- Spread your money out across most if not all of the five main economic sectors:
Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
- Downplay or stay out of stocks in the broker/media limelight.
What has been the most successful investment strategy you’ve experienced?
Are there any rules you follow as part of your investment strategy?
Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books. This article was published on March 23, 2023 and is republished on the Hub with permission.