How can you minimize the risk associated with investing? Start with our three-part Successful Investor approach, and then include stocks that meet these other criteria

How can you minimize the risks associated with investing? Lower-risk investments equate to safer investments. And for conservative investors, that means focusing on investing in high-quality stocks that ideally offer hidden value.

Overall, we also continue to recommend using our three-part Successful Investor philosophy, which focuses on important concepts like portfolio diversification.

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How can you minimize the risks associated with investing? Diversify like we recommend in our three-part Successful Investor philosophy.

Your portfolio strategy should begin with a fundamental piece of advice that we underline frequently as part of our Successful Investor approach. Spread your money out across most if not all of the 5 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.

By advising investors to buy mostly well-established, dividend-paying stocks—and avoiding stocks in the broker/media limelight—Our Successful Investor approach automatically limits your involvement in notoriously trouble-prone areas like new issues, start-up companies and illiquid investments. Of course, you also need to stay out of companies when you have doubts of any sort about the integrity of insiders. You need to recognize the special risks of investing in fashionable or excessively popular minefields, such as Internet stocks in the late 1990s, or income trusts in the previous decade, or green energy in the current decade. We try to alert you to these kinds of risks in our publications.

Rather than avoiding high-risk areas, however, many beginning investors feel drawn to them. That’s because trouble-prone areas always manage to give some investors the mistaken impression that they can generate big and easy profits. Unfortunately, the risks are even bigger.

How can you minimize the risks associated with investing? Start with low-risk investments

At TSI Network we feel that stocks that have been paying dividends for five to 10 years or more are some of the safest investments you can make. Dividends are a sign of quality and a company’s financial health. Types of stocks that we consider to be safer investments include Canadian banks and utilities.

There are also a host of other key indicators to determine if a stock is a safer investment, like management integrity, its growth prospects and its stock price in relation to its sales, earnings, cash flow and so on.

Here are five ways to help you determine the best low-risk investments for your portfolio:

1. Keep stock market trends in perspective. It pays to keep in mind that the stock market often anticipates trends—but no trend lasts forever. As well, stocks sometimes put on lengthy downturns due to business and economic problems—but the downturns typically go into reverse long before the problems get resolved.
2. Be skeptical of companies that mainly grow through acquisitions. Making acquisitions can speed up a company’s growth, but it also adds risk that can undermine a conservative, safer investing approach. Great acquisitions are rare finds. Many acquisitions come with hidden problems or risks, or they turn out to have been over-priced.
3. Look for stocks that have ownership of strong brand names and an impeccable reputation. Customers keep coming back to these businesses, and will try their new products.
4. Keep an eye on a company’s debt. It should be manageable. When bad times hit, debt-heavy companies go broke first. This is one of the best ways you can mitigate risk in your own growth investing strategy.
5. The best stocks should have the ability to profit from secular trends. These trends outlast ordinary business booms and busts, because they reflect ongoing social change. A growing middle class and rising environmental sentiment are just two examples of secular trends.

You can cut your risk all the more by balancing a conservative approach with your aggressive investing

The percentage of your portfolio that should be held in either conservative or aggressive investments depends on your personal circumstances. An investor with a longer time horizon or without the need for current income from a portfolio can invest more money in aggressive investing stocks. But we think that should still be kept to a smaller part of your portfolio.

You should also hold your aggressive investments within a portfolio that reflects our three-pronged Successful Investor wealth-building philosophy. That is, invest mainly in well-established companies; spread your money out across most if not all of the five main economic sectors (Manufacturing, Resources, Consumer, Finance, Utilities); downplay stocks that are in the broker/media limelight. That way, you protect yourself from an unforeseeable industry downturn. You also increase your chances of stumbling upon a market superstar—a stock that does much better than average.

You may stretch these rules a little in aggressive investing, while still sticking to the general principles. You may invest in more companies that are less well-established, compared to a conservative investor.

All investments have some level of risk. How do you work with and manage the amount of risk you are taking on in your portfolio?

What kind of risks have you taken in your investing career? What did you learn from the experience?