There are enough stock market risk factors out there already—listening to permabears, commercial alarmists or magic number just makes it worse.

While it pays to stay aware of stock market risk factors, you should never let them become an obsession.

All investors need to recognize that stock prices do sometimes reach a market peak or “top”, and then go into a slump. However, some investors and advisors make a career out of analyzing past market tops, especially those that were followed by deep declines.

These ‘top-stalkers’ always seem to think the next such decline is just around the corner. Here are three common top-stalker categories.

Permabears

Many of these investors failed to buy when stocks hit a low in 2009, or earlier great buying opportunities, such as in 2002, 1998, 1992—or even 1987. They bitterly resent this lost opportunity, and they let it colour their outlook on the future. Permabears always have their stock market risk factors alarms blaring that a stock’s price always seem “too high.” They let their wish for a second chance-to-buy-cheap turn into a prediction of a market crash that may come decades in the future, if ever.

The Investment Counterpart of Elvis Sightings

Commercial alarmists. Pessimism and dire predictions are the stock-in-trade of some newsletter publishers. They cater to investors who share their views. Some have regularly predicted financial calamity for 30 years or more. Some tie their grim predictions in with predictions of terrorism and social breakdown, the spread of new viruses, or projections of doom based on the financial troubles of Europe, belt-tightening by China’s government or the latest pronouncements of the U.S. Federal Reserve Board. Their forecasts are the investment counterpart of Elvis sightings.

Lucky-lines/magic-numbers specialists

These investors and advisors practice an extreme, near-mystical form of technical analysis (market analysis that focuses on stock-price changes and trading data rather than company fundamentals). Instead of an aid to profitable investing, they are looking for what you might call ‘a sign from heaven’ that we are near the end of the ‘7 good years’ and are about to enter the ‘7 bad years’.

Our investment advice: Be a cautious optimist. Don’t let top-stalkers or other market pessimists keep you out of the market because of the alarming number of stock market risk factors they have seemingly uncovered overnight. Instead, minimize risk by holding a balanced portfolio. Study market indicators and statistics, but see them in light of changing accounting rules, as well as trends in interest rates and the economy. You might sometimes get excited about junior stocks, but recognize that new or unproven companies involve extra risk. After all, mineral finds are valuable because they’re rare, and technological innovations face heavy competition.

But above all, skeptical optimists recognize that they are investing in a company, rather than an economy, a mineral find or a product. So they focus their stock investing on companies that make money, pay dividends and serve customers well. In the end, these are your surest signs of a successful investment.

If you truly want to mitigate investment risk you should try following our three-part strategy: Invest mainly in well-established, dividend-paying companies; spread your money across most, if not all, of the five main economic sectors (Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities); and avoid stocks in the broker/media limelight.

If you buy gradually during the course of your investing career, in both good and bad years for the stock market, market declines will have little effect on your long-term profits.

Investor bonus: Exchange-traded funds are some of the best investments to choose as a starting point when building a portfolio—and the best ETFs offer you a well-balanced portfolio of high-quality stocks that can minimize stock market risk factors.

If you start out with exchange-traded funds, we recommend putting roughly half of your contributions into a Canadian exchange-traded fund and the remaining half into an exchange-traded fund holding U.S. stocks. ETFs, with their relatively low management fees (MERs), are a better deal for investors than mutual funds. As well, regulatory changes in Canada are forcing brokers to disclose all the costs associated with mutual funds and other similar investments. That should further increase the appeal of ETFs.

To sum up, whether you start your investing in ETFs, mutual funds or stocks, be aware of becoming obsessed with stock market risk factors.

Do you base your investments on assumptions on how the stock market will do, or are you more inclined to hold stocks through the ups and downs of the market? Let us know what you think.