Learning the best ways to mitigate investment risk will go a long way toward helping you build a sound and safer stock portfolio

If you want to mitigate investment risk, our best advice is to follow our three-part Successful Investor strategy: Invest mainly in well-established, dividend-paying companies; spread your money across most, if not all, of the five main economic sectors (Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities); and avoid stocks in the broker/media limelight.

Meanwhile, if you buy gradually during the course of your investing career, in both good and bad years, stock market declines will have little effect on your long-term profits.

ETFs can help mitigate investment risk, especially when you are just starting out in investing

We still feel that investors will profit the most with a well-balanced portfolio of high-quality individual stocks, but ETFs can also play a role in a portfolio—especially when investors are just starting out and may not yet have the funds to build a balanced stock portfolio. Here are some tips on how to find the best performing ETFs.

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As mentioned, exchange-traded funds are some of the best investments to choose as a starting point when building a portfolio—and the best ETFs offer you a well-balanced, low-fee portfolio of high-quality stocks that can minimize stock market risk factors.

If you start out with exchange-traded funds, we recommend putting, say, roughly half of your contributions into a Canadian exchange-traded fund and the remaining half into an exchange-traded fund holding U.S. stocks. Note that ETFs, with their relatively low management fees (MERs), are a better deal for investors than mutual funds. As well, regulatory changes in Canada are forcing brokers to disclose all the costs associated with mutual funds and other similar investments. That should further increase the appeal of ETFs.

Cryptocurrencies like bitcoin are not a sound way to mitigate investment risk

We wrote about bitcoin in November 2017, and it didn’t inspire our confidence. It seemed that bitcoin fans were accepting all sorts of favourable assumptions and guesswork about bitcoin. It was clear they were eager for listeners to see bitcoin as a highly secure, if not sure-fire, way to multiply wealth.

Back then, most bitcoin enthusiasts were also bitcoin investors. They owned bitcoin as a personal investment, if not a personal statement. Many seemed to believe it would inevitably reach a high place in our future global monetary system. Some thought it had a chance of one day assuming the central role of the U.S. dollar. Many fans seemed convinced of all this from a political or philosophical point of view.

We said back then, “The blockchain technology that bitcoin rests on seems to have a lot of commercial applications, and is undoubtedly a revolutionary invention. But bitcoin is just the first of many digital “cryptocurrencies” that depend on blockchain technology. Why assume bitcoin is the ultimate cryptocurrency? Why assume bitcoin will stay in the lead, simply because it was first in the market. Above all, why assume that U.S. dollar users will go along with the narrative and shift to bitcoin?

Entrepreneurs launched more than 150 blockchain-based bitcoin alternatives. Bitcoin enthusiasts lapped them up. That’s a classic sign of an investment mania. Manias begin as a mass attraction to a specific investment or area of investment. They go on to include a wide range of related investments and merchandise that have an ever-fainter resemblance to the spark that got things rolling.”

In November 2017, we said the bitcoin story could still have a lot of life left in it. I made clear I wasn’t saying that the bitcoin boom would end overnight. But we still advise against investing in bitcoin, since the odds in our view are heavily weighted against you.

Consider some additional ways to mitigate investment risk and boost your portfolio returns

Investors should balance aggressive and conservative investments in their portfolio, in line with their investment objectives, and the market outlook. They should also hold some value stocks, as well as some growth shares, in their portfolios.

And above all, consider the market outlook when making investment decisions and avoid the urge to become more aggressive as prices rise and more conservative as prices fall.

Putting the best low-risk investments in your Successful Investor portfolio means safer, high-quality stocks

At TSI Network we feel that stocks that have been paying dividends for over 10 years are some of the safest investments you can make. Dividends are a sign of quality and a company’s financial health. Types of stocks that we consider to be safer investments include Canadian banks and utilities.

There are also a host of other key indicators to determine if a stock is a safer investment, like management integrity, its growth prospects and its stock price in relation to its sales, earnings, cash flow and so on.

All in all, we recommend following our Successful Investor approach and focusing on those companies that have maintained or raised their dividends during an economic or stock-market downturn. We think investors will profit most—and with the least risk—by buying shares of well-established, dividend-paying stocks with strong growth prospects.

What are the riskiest investments you’ve learned to avoid?