Here’s a guide to building a strong portfolio through smart financial investing

Financial investing involves buying assets—like stocks, bonds, and ETFs—with the expectation of income and/or capital gains.

Here are some tips aimed at helping investors manage their financial investments while cutting the risk of their portfolio and increasing profits.

The best tip for financial investing

To show the best long-term results, we think you should stick with our three-part TSI Network investing program (but keep in mind that this approach is a starting point to success in investing, not a step-by-step blueprint):

1. Invest mainly in well-established companies, with a history of rising sales if not earnings and dividends.

2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities.

3. Downplay or avoid stocks in the broker/media limelight. When stocks spend time in the limelight, they tend to become over-priced, and this leaves them vulnerable to a sharp downturn on any hint of bad news. Instead, look for stocks with hidden value that are less widely recognized—at least so far—as attractive investments.

Financial investing tips to cut risk and increase profits in your stock portfolio

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.

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.

Hold a reasonable portion of your portfolio in U.S. stocks: We continue to recommend that Canadian investors diversify part of their portfolio (up to 25%, say) in well-established U.S. stocks. That’s because the U.S. market features major multinational opportunities that simply aren’t available anywhere else. As well, many U.S. firms are unique world leaders.

Think like a portfolio manager: As part of their stock market research, portfolio managers gather information from 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 often happens.

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.

Bad times usually hit some market segments much more severely than others. That’s why we advise spreading your money out across the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities.

Give your investments time to pay off: Resist the ever-present urge to buy and sell. A sound portfolio, built through careful research, needs surprisingly few changes over the years. Trading less frequently is a good thing, because it gives you fewer occasions to make costly mistakes.

Bonus Tip: Four risks of relying too heavily on p/e ratios

The p/e ratio (the ratio of a stock’s price to its per-share earnings) is one of many handy investing tools.

Typically, you calculate p/e’s using a stock’s current price and its earnings for the previous 12 months. The general rule is that the lower a stock’s p/e, the better. And a p/e of less than, say, 10, represents excellent value. A low p/e implies more profit for every dollar you invest.

There’s no doubt that p/e ratios are an important part of many investors’ decision making. These financial ratios are published regularly on the Internet and in newspapers, and are widely followed.

P/e financial ratios are a good starting point for researching a stock you’re considering buying (or selling). But relying too heavily on these financial ratios can expose you to serious risk. Here are 4 risks of relying too heavily on p/e ratios.

1. P/e’s can give you a misleading picture of a company’s earnings
2. Beware of suspiciously low p/e’s
3. Don’t discount stocks with high p/e’s
4. Low p/e ratios can mask hidden value

Assessments and judgments for choosing attractive investments

Diversify geographically: One of the worst things you can do is invest so that your portfolio would suffer a great deal due to a localized downturn in any one city, state or province. Ideally, your portfolio should give you exposure to much of the North American economy, plus substantial international exposure, if only through North American multinationals.

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.

How do you feel about these financial investing tips? Share your thoughts with us in the comments.