A diversified stock portfolio example focuses on high-quality stocks—both conservative and aggressive–-with your holdings spread across most if not all of the five main economic sectors

When it comes to building an investment strategy, don’t let sound bites and vague predictions warp your stock-trading decisions. Instead, minimize your portfolio risk by following our three-part Successful Investor approach: Invest mainly in well-established, dividend-paying companies; spread your money across most, if not all, of the five main economic sectors; and avoid stocks in the broker/media limelight.

Following a proper diversified portfolio example is a good way for investors to cut risk at the same time they maximize portfolio returns. As a key part of their portfolio diversification strategy, most investors should have investments, as mentioned, in most, if not all, of the five main economic sectors. At the same time, the proper proportions for you depend on your temperament and circumstances.

How Successful Investors Get RICH Learn everything you need to know in 'The Canadian Guide on How to Invest in Stocks Successfully' for FREE from The Successful Investor. How to Invest In Stocks Guide: Find 10 factors that make your investments safer and stronger.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

Use a diversified stock portfolio example to balance and stabilize your investment approach

Balance aggressive and conservative investments in your Successful Investor portfolio, in line with your investment objectives and risk tolerance. Above all, avoid the urge to become more aggressive as prices rise and more conservative as prices fall.

We believe you should develop a clear idea of how much risk you are willing to accept, through good times and bad. For example, some investors become more aggressive as the market rises and more conservative as the market falls. The problem here is that all market trends, up or down, eventually reach a turning point. If you take on more risk as the market rises, you’ll wind up owning your riskiest portfolio just when the market is near a peak. That’s when risky stocks can do their greatest harm to your net worth.

Furthermore, building a balanced Successful Investor portfolio should include a mix of growth and value stocks, big and small stocks, and so on.

Take advantage of a solid diversified stock portfolio example that uses the five sectors approach to help you reduce your investing risk

Here are some tips on diversifying your stock portfolio by sector:

• When it comes to a diversified stock portfolio, stocks in the Resources and Manufacturing & Industry sectors generally 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.

Follow a diversified stock portfolio example that includes market leaders and laggards to learn how to balance your investments

Market leaders and market laggards both deserve a place in your 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.

The market leaders of any industry are strongly placed to fend off new entrants and expand their earnings. That enhances their ability to raise their dividends. Market leadership could also be thought of as a “moat,” or a distinct and long-lasting competitive advantage.

Examples of market leaders include high-quality blue-chip stocks. Blue-chip companies are typically defined as firms whose stocks have a national or international reputation for quality, reliability and the ability to operate profitably in good times and bad.

You can still look at top blue chips as the strongest and most secure stocks on the market. Blue chip companies almost all involve:

• Manageable debt
• A history of paying dividends
• Industry prominence if not dominance
• Freedom to serve all shareholders

Use long-term value investing as a key part of building your balanced and diversified portfolio

The core of the long-term value investing approach is identifying well-financed companies that are established in their businesses and have a history of earnings and dividends. They are likely to survive any economic setback that comes along, and thrive anew when prosperity returns, as it inevitably does.

When you look for stocks that are undervalued, it’s best to focus on shares of quality companies that have a consistent history of sales and earnings, as well as a strong hold on a growing clientele.

Here are three of the financial ratios we use to spot them:

1. Price-earnings ratio
2. Price-to-sales ratio
3. Price-cash flow ratio

Investing in the U.S. market is a good way to diversify, too

The U.S. market gives you access to many of the world’s top stocks. These stocks come in a range of sizes and quality that’s largely unavailable in Canada, but we confine our recommendations to the highest-quality U.S. stocks.

We recommend that Canadian investors have as much as, say, 20% to 30% of their portfolios in U.S. stocks in order to improve the diversification and growth potential of their investments. Note that we also see currency diversification as a plus.

What other considerations do you make while diversifying your portfolio?

How did you use a diversified stock portfolio example when you began investing?