A successful, yet simple investment plan is to take a conservative approach: buy high-quality blue chip stocks that have a record of producing profits and paying dividends.

When they first set out to formulate a simple investment plan, many investors decide to base investment decisions on a handful of measures.

A good general rule to follow when choosing investments: Simple is better. The easier an investment is to explain and understand, the less likely it is to harbour hidden risks and costs that can only work against you. As the old investor saying goes, “Stick with plain vanilla.”

A simple investment plan is the best

The best investment plans or systems use a variation of the value investing approach. That is, they revolve around choosing high-quality investments and diversifying your holdings. Our Successful Investor approach takes that general description a little further. We advise you to invest mainly in well-established companies; focus on companies that are outside the broker/media limelight; and spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; Utilities).

Most simple investment plans should take a conservative approach

Conservative investing is an investment strategy that involves a focus on lower-risk, predictable and stable businesses. This strategy typically involves the purchase of blue-chip stocks and other low-risk investments. A conservative investing approach also means building a well-balanced portfolio gradually, over time. The number of stocks in your portfolio will depend on where you are in your investing career.

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In our view, your goal as an investor, particularly if you follow a conservative investing strategy like the one we recommend, is to make an attractive return on your investments over a period of years or decades, but with lower risk.

On the other hand, failure means making bad investments that leave you with meagre profits or losses. Unsuccessful investors can still make some profits. They just don’t make enough to offset the inevitable losses and leave themselves with an attractive return.

For example, if you focus on the idea that you never go broke taking a profit, you may be tempted to sell your best investments whenever it seems the investment outlook is clouding over.

On occasion, you may succeed in selling just prior to a major downturn, and buying back at much lower prices. More often, prices will soon hit bottom and move up to new highs. If you buy back, you’ll pay higher prices. If you had followed this strategy with Canadian bank stocks, for example, you could have missed out on some big gains over the years.

In hindsight, market downturns are easy to spot. Spotting them ahead of time is much harder, and impossible to do consistently. After all, if you could consistently spot market downturns ahead of time, you could acquire a large proportion of all the money in the world, and nobody ever does that.

The problem is that you’ll foresee a lot of market downturns that never occur. All too often, the market-downturn clouds disperse soon after skittish investors have sold. Good reasons to sell do crop up from time to time, of course, even if you follow a long-term conservative investing approach. But “you’ll never go broke taking a profit” is not one of them.

Finding high-quality “value” stocks as part of a simple investment plan

One of the sweetest and most profitable pleasures of successful investing is to buy high-quality “value stocks” (or stocks that are reasonably priced, if not cheap, in relation to their sales, earnings or assets), then hold on to them as investors recognize the value and push up the share price.

Value stocks are typically stocks trading lower than their financial fundamentals suggest. They are perceived as undervalued, and have the potential to rise. Many new tech stocks, for instance, start out as growth stocks and transition into value stocks.

When they look for value stocks to buy, investors usually start by looking at a few basic ratios. For example:

• Low price-to-earnings and price-to-sales ratios—signs of cheap or undervalued investments.
• Low price-to-book-value ratio—another sign that a stock may be cheap in relation to other stocks on the market.
• High dividend yield—the stock’s annual dividend divided by the share price. A high dividend yield could indicate a cheap stock that is set to rise.

Bonus Tip: Simple is better with emerging market investments

If you want to invest in something like emerging-economy stocks, limit your stake to a point where you can accept the associated foreign exchange risk. If you buy an ETF, choose a “plain vanilla” unhedged version. Hedged ETFs invest in foreign stocks, but “hedge” against any movements in the foreign currencies. That means that the ETF’s Canadian-dollar value rises and falls solely with the movements of the stocks in its portfolio, and is not affected by changes in the exchange rate between the foreign currencies and the Canadian dollar. But the cost of hedging can go up or down and is independent of the positive impact hedging may have on your portfolio.

Or, to adapt yet another old investor saying, “If the foreign-exchange risk on your emerging-market investments keeps you awake at night, sell down to the sleeping point.”

What were the first stocks you invested in … What were the simplest investments that have continued to be valuable to you?

Though a simple investment strategy may not be exciting, it does tend to be easier to manage. In the past, what’s been the lure of a more-complex investing plan?