Both new and established investors interested in building a sound stock portfolio need to avoid picking too many speculative stocks and instead focus on high-quality investments. At the same time they should spread their holdings out over most if not all of the five sectors

Many people begin an investing career with a single purchase—one stock, say, or a mutual fund. They may harbour a mistaken or exaggerated idea of the gains this investment will bring. They’ll follow up with more investments, and results will vary widely. Their biggest gains may come from stocks that seemed least likely to deliver a profit. Their favourite buys may yield weak profits if not losses.

You need this kind of practical experience to drive home the fact that nobody guesses right every time about investment decisions. That’s when most investors get interested in building a stock portfolio made up of a variety of sound investments. Of course, it takes a few tries at portfolio-building to reach a skill level that works best for you.

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Building a stock portfolio as a beginning investor can lead to a narrow portfolio or ill-advised selections

Many first portfolios consist of choices from a single theme or area of investment interest. One young investor I spoke to recently had acquired a cryptocurrency portfolio. His biggest holding was in bitcoin, the original cryptocurrency—the “blue chip” of the category. He had smaller commitments in newer, more speculative cryptocurrencies, including Litecoin, Ethereum and Ripple.

Over the decades, I’ve heard from investors whose first portfolio was a collection of gold coins, or penny stocks with mining claims close to a producing mine, or start-up tech stocks from a single industry. They expected their newfound portfolio orientation to protect them against losses and lead to above-average gains. But with investments like these, results are bound to vary widely. That’s because they depend almost entirely on market timing: gains and losses depend mainly on when you get in and when you get out.

Any stock can make money for you if you get in and out at the right time. You can say the same thing about any portfolio of stocks. Unfortunately, no one can consistently make money with investments that require accurate market timing. The random factor in stock prices is too strong even in high-quality stocks, and stronger still in speculative stocks.

After gaining some experience with selecting investments and building a stock portfolio—and with our Successful Investor advice—most serious investors go on to recognize that success as an investor requires something more. You need to develop what you might call a successful investor mindset.

Three key Successful Investor ideas that play a role in that mindset for building a stock portfolio

A healthy sense of skepticism: Experience tells these investors that it pays to take an optimistic view, but to temper it with hard-edged skepticism.

These investors study market indicators and statistics, but see them in light of changing accounting rules, as well as trends in interest rates and the economy. They do sometimes get excited about junior stocks, but they recognize that new or unproven companies involve extra risk. After all, mineral finds are valuable because they’re rare, and technological innovations face heavy competition.

But above all, skeptical optimists recognize that they are investing in a company, rather than an economy, a mineral find or a product. So they focus their stock investing on companies that make money, pay dividends and serve customers well. In the end, these are your surest signs of a successful investment.

An appreciation for the recurring patterns that do exist in the world of investing: When successful investors discuss developments such as today’s cryptocurrency situation, you may hear somebody say, “We’ve seen this movie before.” This means they’ve lived through this financial-drama situation before. They know the outcome is unpredictable. They also know it will end badly for latecomers, and has probably already gone beyond the point where it offers great opportunity to outsiders.

An affinity for a steady, middle-of-the-road approach to investing: A steady, middle-of-the-road approach offers better odds than erratic or extreme alternatives. That’s because it relies less on timing, or on guessing right about the future. Instead, it helps you take advantage of what you might think of as the laws of financial physics.

You still have to decide what stocks to buy and what stocks to sell, and some of your decisions will disappoint you. But with a successful investor mindset, your best choices will produce a lot more profit over long periods, and will overwhelm the costs of your disappointments.

Looking for easy investments for beginners? Start with a well-diversified portfolio holding high-quality stocks that reflect our Successful Investor philosophy

If you’re new to investing, 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. Canadian citizens who own shares in Canadian stocks that pay dividends will also benefit from a special tax credit they may be eligible to receive.

Remember to spread your portfolio out across most if not all of the five main economic sectors: Resources; Manufacturing; Finance; Utilities; and Consumer. By diversifying across the sectors, you also increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.

What guidelines do you follow for building your diversified portfolio?

Beginning investors go through a lot of trial and error when they start building a portfolio. What are some of the big mistakes you learned from when you started investing?