There is a randomness to stock market growth that can lead investors to make poor decisions if they don’t keep diversification and long-term goals in mind

When we step back from looking at the market’s day-to-day fluctuations, and instead try to figure out where stock prices might go in the next five or 10 years and beyond, we feel optimistic.

Stock market growth can happen in various ways. Lengthy sideways phases have happened in the past. In the end, they have always given way to a new rise that carried prices far above the previous sideways movement.

The random side of stock market growth

Stock market movements have a large random element to them. It’s all too easy to read some predictive quality into them that really only exists in the viewer’s mind. A rise that seems “too far and too fast” may lead into a slower but longer-lasting rise that goes on for years.

Of course, as always, a market decline of 10% to 20% could come along at any time without warning. This, though, is always a risk in the stock market. Accepting this risk is the price you pay if you want to take advantage of the market’s long-term growth opportunities and the hedge it provides against inflation.

Keep long-term investing goals in view during times of stock market growth

In our view, your goal as an investor, particularly if you follow our Successful Investor conservative investing strategy, is to make an attractive return on your investments tracking stock market growth over a period of years or decades. Failure means making bad investments that leave you with meagre profits or losses.

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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. If you focus on the idea that you never go broke taking a profit, you may be tempted to sell your best Successful Investor 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 never go broke taking a profit” is not one of them.

Stock market growth: Aggressive stocks should not take too much space in your portfolio

If an aggressive stock seems to check out reasonably well, you may want to take a chance and add the stock to your portfolio.

But even if you do invest in an aggressive stock, it’s best to keep it to only a small part of your portfolio.  As well, it’s also a good idea to fit it into a portfolio well-diversified across most if not all of the five main economic sectors. That’s especially so if the aggressive stock is in either of the two most volatile sectors, Manufacturing & Industry, or Resources & Commodities.

After that, you need to monitor the stock much more closely than your other holdings, because of the more speculative nature of your investment. You’ll need to make a lot of difficult sell-or-hold decisions as the stock’s fortunes wax and wane. If it rises faster than your other holdings, you’ll need to decide if you’ll sell some from time to time or if you’ll let it represent an ever-growing portion of your portfolio.

Keep these key risk factors in mind investing in the stock market:

There are several considerations that go into a successful investing strategy. Still, many investors overlook a number of important factors that can lower their risk.

In the end, there’s no such thing as risk-free investing. The tips below are for lowering your investing strategy risk and have long been part of the Successful Investor approach.

• Balance your cyclical risk
• Be skeptical of companies that mainly grow through acquisitions
• Don’t overindulge in aggressive investments
• Keep an eye on a stock’s debt
• Keep stock market trends in perspective
• Look for stocks that have ownership of strong brand names and an impeccable reputation
• The best long-term stocks should have the ability to profit from secular trends

“You’re never go broke taking a profit” is a tempting philosophy to adopt. When was the last time you resisted that urge and what was the outcome?