Learn how to successfully invest in stocks with these five key tips.

Studying the earmarks of successful investments is a better strategy than trying to master market timing. Your long-term investment results will improve a great deal if you simply learn to spot and recognize these telltale signs, and understand how they differ from the common risk factors in unsuccessful investments.

You can learn how to successfully invest in stocks by following the tips we share below.

How to successfully invest in stocks: Think like a portfolio manager

As part of their stock market research, portfolio managers gather information on companies, industry studies and other sources. A good portfolio manager then tries to build their client a portfolio that makes money if things go well, but won’t lose too much if the opinions turn out to be faulty, as can happen.

We do our own stock market research for our newsletters and investment services, and we apply it from a portfolio manager’s perspective. That’s why we advise sticking to well-established companies; they tend to hold on to more value when things go wrong, or at least recover eventually.

How to successfully invest in stocks: Practice patience with your investments

All too often, investors buy a promising stock just as it enters a period of price stagnation. Even the best-performing stocks run into these unpredictable phases from time to time. They move mainly sideways in a wide range for months or years before their next big rise begins. (Stock brokers often refer to these stocks as “dead money.”)

If you lack patience, you run a big risk of selling your best choices in the midst of one of these phases, prior to the next big move upward. If you lose patience and sell, you are particularly likely to do so in the low end of the trading range, when stock prices have weakened and confidence in the stock has waned.

How to successfully invest in stocks: Look beyond financial indicators

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 an earnings growth rate of 20% or more a year, and perhaps a 2% dividend yield.

This approach worked a lot better in the pre-computer age, when investing was more labour-intensive. Few people wanted to dig through old newspapers, annual reports and other material to get at the data. So more gems were left to be found by those willing to do the work.

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 successfully invest in stocks: Seek dividend-paying investments

One tip we share often is to invest in companies that have been paying a dividend for 5 or more years. Dividends are typically cash payouts that serve as a way for companies to share the wealth they’ve accumulated. These payouts are drawn from earnings and cash flow and paid to the shareholders of the company. Typically these dividends are paid quarterly, although they may be paid annually or even monthly as well. Canadian citizens who own shares in Canadian stocks that pay dividends will also benefit from a special tax break they may be eligible to receive.

How to successfully invest in stocks: Build a diversified portfolio

Always maintain a diversified stock portfolio—and avoid the temptation of trying to pick hot stocks or sectors.

Different investors may be more comfortable holding a larger or smaller number of investments in their portfolios, including stocks, mutual funds or exchange-traded funds (ETFs). Here are some tips on diversifying your stock portfolio:

● When it comes to a diversified 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 should have investments in most, if not all, of these five sectors. The proper proportions for you depend on your temperament and circumstances.

What’s the primary strategy you’ve used to find success during your investing career?

How long did it take you to develop a successful investing strategy? Do you have any tips you would share with young investors?