Some of the best stock market tips focus on selecting the right blue-chip stocks, and then diversifying and balancing your portfolio

We continually scour the Canadian and U.S. markets for new stocks to recommend as buys. We generally get excited about only a handful—that is, excited enough to recommend them as buys in our publications.

Here are some stock market tips we use for finding the best stocks to invest in.

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Stock market tips: Blue-chip companies are a great place to start

You may be surprised to find out that the root of the term “blue-chip” stems from the game of poker, as the blue-chips represent the highest value.

We define a blue-chip company as a well-established company with attractive business prospects. Well-established companies have the asset size and the financial clout—including solid balance sheets and strong cash flow—to weather market downturns or changing industry conditions.

Blue-chip stocks have strong positions in healthy industries. They also have strong management that will make the right moves to remain competitive in a changing marketplace.

In a deep or long-lasting market setback, your blue-chip stocks will tend to go down, along with everybody else’s. But we think they will go down less and recover sooner. Of course, nobody can guarantee that. For that matter, nobody can put a limit on how deep a market setback will go, nor how long it will last.

We feel most investors should hold the bulk of their investment portfolios in securities from blue-chip companies. Generally, 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, compared to alternative investments.

Stock market tips: Smaller stocks can play a role in your portfolio

While we believe that investors should devote the largest part of their portfolios to large, well-established “blue-chip” securities, this does not rule out smaller stocks. Indeed, a strong portfolio anchored with blue-chip stocks offers the opportunity to invest in promising smaller companies without subjecting yourself to excessive risk.

And the best of these smaller companies may one day grow into blue chips themselves.

Most successful investors will own shares in a variety of companies of varying sizes. But here’s one thing your best choices will have in common: each will be about the right size to succeed in the business it is in.

Stock market tips: Diversify and balance your portfolio

Your portfolio strategy should begin with a fundamental piece of advice that we underline frequently. Spread your money out across most if not all of the five main economic sectors (Finance, Utilities, Manufacturing, Resources, and the Consumer sector). The proportions should depend on your objectives and the risk you can accept. The Canadian Finance and Utilities sectors involve below-average risk. Manufacturing and Resources tend to be riskier, and the Consumer sector is in the middle.

Balance aggressive and conservative investments in your portfolio, in line with your investment objectives, and the market outlook. Above all, avoid the urge to become more aggressive as prices rise and more conservative as prices fall. The best portfolio management also means balancing your investments geographically. Avoid focusing your portfolio on any one country or region.

Stock market tips: Out-of-favour stocks can offer good value

Market leaders and market laggards both deserve a place in your Successful Investor portfolio. Over long periods, high-quality stocks play leapfrog. Some of the lowest-risk, highest-profit buys you’ll ever find are overlooked or out-of-fashion stocks of high investment quality that are coming back into investor favour.

Lower-risk investments equate to safer investments. For safer investing, focus on investing in high-quality stocks that may seem undervalued, but 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.

Stock market tips: Avoid selling blue-chips too soon

Most investors who succeed over decades have come to see, often after a period of costly stock-trading errors, that you make most of your stock market profits through stock selection rather than stock market predictions.

If you make a habit of selling whenever you feel the market’s risk has gone up, you will wind up selling your best stocks way too early. Before you act on a selling rationale, take a broader look. Consider facts about the stock, and about your investment goals and temperament. If the selling rationale makes sense and you find additional good reasons to sell, then selling may be the right thing to do. But it’s always a bad idea to sell a good stock for trivial or transitory reasons.

What investing tips have actually hurt your returns?