Some investors recognize that their investing strategy is failing and want to learn how to begin investing differently. We recommend that these investors diversify, look beyond financial factors, and stop trying to pick market tops and bottoms

More and more, I find that I cringe a little every time an investor tells me that they recognize their current investment approach is not appropriate, but they are not yet ready to switch.

With a little probing, these investors usually go on to explain that they have lost too much money with the current approach, and they “can’t afford” to sell out at current prices and convert that paper loss into a real one. These investors need to learn how to begin investing differently instead of sticking with the current plan for an indefinite period. Sometimes they want to hold on to their current portfolio until they get back to break-even. Others say they’ll be satisfied if the current loss shrinks by, say, half.

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How to begin investing differently: Start looking beyond financial factors 

When they first set out to formulate an investment strategy, many investors decide to focus their stock market research on a handful of measures. For instance, they may want to see a p/e ratio (the ratio of a stock’s price to its per-share earnings) below 15.0, say. Along with that, they want an earnings growth rate of 20% or more a year, and perhaps a 2% dividend yield.

Today, if you find a stock with this (or any comparable) combination of favourable ratios, it probably comes with some more-or-less hidden drawback not covered by your system. Instead of steering you away from investments that you don’t understand, or that harbour hidden risk, this system will steer you toward them.

How to begin investing differently: Stop targeting market tops and bottoms

In hindsight, it always seems easy to spot market tops and market bottoms. But trying to spot those tops and bottoms as they occur is harder. It’s also why those who follow the Successful Investor approach know better than to think they can. We have investigated all sorts of market theories and signals that purport to tell you how to do it. They all seem to have “worked,” at least some of the time. But none worked consistently.

The problem is that market tops and market bottoms can take place in response to anything that is going on in the market, the economy and the world. But buy and sell signals focus on a tiny smidgen of that vast amount of data. A market signal “works” when the market is responding to the same slice of data that the signal focuses on. It quits working as soon as the market’s focus moves on to something else.

Investors who succeed over decades—the Warren Buffett’s of the investment world—rarely, if ever, talk about spotting market tops and bottoms. They are far more likely to talk about successful investments than successful market predictions. Most have come to see, often after a period of costly stock-trading errors, that you make most of your stock market profits through the kind of stock selection outlined by the Successful Investor philosophy.

As an aside, some investors have asked: Why do we not sell stocks that shoot up quickly, and then buy them back in a month or two when the market is lower? Here are some reasons: for one, the market may not go down. For another, when the market is headed for a rise, the best performers in that rise will often begin rising much earlier, and much quicker, than the market averages.

Even though we recommend focusing on blue chip stocks, even they will still have issues from time to time 

At TSI Network, we have a high opinion of blue chips (“high-quality” or “well-established” stocks, as we refer to them). But every year, some high-quality stocks turn out to be major disappointments. We developed our Successful Investor philosophy in part as a guide to protect you from the risk of loading up too heavily on a stock, or stocks, that are headed for a deep slump. That guide includes diversification.

Here is how to diversify your stock portfolio:

• Stocks in the Resources and Manufacturing & Industry sectors in general expose you to above-average share price volatility.
• Stocks in the Utilities and Canadian Finance sectors entail below-average volatility.
• Consumer stocks fall in the middle, between volatile Resources and Manufacturing companies, and the more stable Canadian Finance and Utilities companies.

Most investors following our Successful Investor approach should have investments in most, if not all, of these five sectors. The proper proportions for you depend on your temperament and circumstances.

Conservative or income-seeking investors may want to emphasize utilities and Canadian banks for their high and generally secure dividends. More aggressive investors might want to increase their portfolio weightings in Resources or Manufacturing stocks.

What’s the first action you take when changing an investment strategy focus?

Have you been stuck in an investment plan that isn’t working? What finally made you decide to cut your losses and try something new?