Conservative investors: Follow our three-part Successful Investor if you want to maximize your portfolio returns with the least amount of risk

The surest way for conservative investors to make money in stocks is to start out by following our three Successful Investor rules for sound investing. They are the foundation of our Successful Investor system.

The first of these three Successful Investor rules is to invest mainly in well-established, profitable, dividend-paying companies. This rule goes first because it’s a simple and effective way of controlling the risk in your portfolio. Needless to say, that control is especially important when you have retired and you depend on your investments for income.

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If a stock lacks one of these signs of investment quality, it may be riskier than you realize, yet still offer long-term potential. If it lacks two of the three, it exposes you to above-average risk and is suitable mainly for aggressive investors. If it lacks all three, it’s a high-risk speculation.

If you want to buy stocks missing all three of these qualifiers, it’s best to do so only with money you can afford to lose.

Avoid the urge to diversify into junior or riskier stock groups, just because they might offer the possibility of bigger gains. Stick with stocks that leave you feeling comfortable.

Diversification across sectors is also key for conservative investors

The second rule for conservative investors in our system is to spread your investments out across most if not all of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities.

When you follow this rule, you are taking note of the fact that a large random element is at work throughout the financial universe.

When you spread your holdings out like this, you diversify in a way that helps you avoid overloading yourself with stocks that are about to slump.

Unpredictable slumps may be due to weak industry conditions, changes in investor fashion, or other random factors. That’s a bigger risk if you concentrate your stock holdings in one or two of the five main sectors.

Simply staying aware of the concept of diversification can put you ahead of inexperienced investors who take a casual approach. But, beware of half-hearted diversification. It can hurt your investment results, rather than help.

For instance, beginners may zero in on investments that seem to have huge growth potential. Today’s examples might include concept stocks that focus on lithium mining, say, or AI (artificial intelligence), or cryptocurrency. If you disregard our first Successful Investor rule (see above), you’ll mainly wind up buying high-risk speculations that pay off sporadically at best.

Concept stocks have a business plan, but have not yet established an actual business, much less made any money or paid any dividends. Stocks like these expose you to a serious risk of total loss. Losses are almost inevitable, no matter whether you plunge into a single high-profile issue, or ‘diversify’ by buying half a dozen.

This is why our first rule favours well-established, profitable, dividend-paying companies. Companies like these are at less risk of sudden changes in industries or tech developments. It’s why our second rule calls for spreading funds out across most if not all of the five sectors.

Conservative investors, don’t overlook this last TSI core principle

Our third rule is for conservative investors to downplay or avoid stocks (or investments of any kind) in the broker/media limelight. Never buy a stock just because of how much exposure it gets in brokerage materials or the media.

All sorts of companies, good and bad, seek out a presence in the limelight. It’s like free advertising for stocks that get admitted. Brokers and the media are always looking for investment ideas that appeal to investors. Focusing on stocks in the limelight can at times lead you to big winners. It can also lure you to buy stocks that are headed out of the limelight and into the dumps.

Of course, brokers and the media want to do well for their readers and investors. But office politics enters into it as well. Some stocks get in the limelight thanks to connections in finance or the media.

The limelight rule applies to new stock issues, long-time market favourites, and out-and-out stock promotions. When stocks in the limelight fail to live up to excessive expectations, downturns can be brutal.

What rules do you follow as a conservative investor?