Learning how to get started investing in the stock market is easier when you take the Successful Investor approach and focus on building a diversified portfolio of high-quality stocks

If you’re ready to learn how to get started investing in the stock market—or for that matter, if you are already an experienced investor—then here are some key tips:

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How to get started investing in the stock market: Everyday qualities—not big ideas—are key to successful investing

If you ask investors who have a few decades of investing behind them, few, if any, will credit their success to any one investment or investing technique. Instead, most will talk about the value of everyday qualities like patience, consistency and a healthy sense of skepticism—in short, the kind of qualities that bring success in all aspects of life, not just investing.

Economic problems come and go. But in any reasonably free economy, the long-term stock market trend points upward. To succeed as an investor, all you really need to do is find a low-risk way to cash in on that trend during the good times, and avoid losing all your gains and capital during the inevitable setbacks.

One key to a long and profitable investing career is to win by not losing. Resist the temptation to act on impulse, emotion or tips. Stay out of investments that require extraordinary luck or timing. Likewise for anything that requires you to pay high and continuing fees and brokerage commissions.

How to get started investing in the stock market: Build a diversified portfolio

At TSI Network, we have a high opinion of blue chips (“high-quality” or “well-established” stocks, as we refer to them). But every year, some high-quality stocks turn out to be disappointments. We developed our Successful Investor philosophy in part as a guide to protect you from the risk of loading up too heavily on a stock, or stocks, that are headed for a deep slump. To do that you need to diversify.

• 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 following our Successful Investor approach should have investments in most, if not all, of these five sectors. The proper proportions for you depend on your temperament and circumstances.

Here is how to diversify your stock portfolio:

Conservative or income-seeking investors may want to emphasize utilities and Canadian banks for their high and generally secure dividends. More aggressive investors might want to increase their portfolio weightings in Resources or Manufacturing stocks.

How to get started investing in the stock market: Avoid investing in themes plucked from the headlines—and stocks in the broker/media limelight

Theme investing has a natural appeal. It seems to simplify things. Investors like it because they feel it can put their investment returns into overdrive. Some also feel it adds fringe benefits to their investing, by letting them support social or environmental objectives.

Brokers like it because it gives them a rationale to recommend a variety of stocks.

If the client supports environmental causes, the broker can propose investments with a “green theme.” They may include solar-power equipment makers; companies that claim their products are less harmful to the environment than competitors’ products; or companies that claim to operate with a high degree of environmental concern.

When you focus on theme investing, however, it’s easy to overlook the fundamentals.

Likewise, stocks that are in the broker/media limelight tend to expose you to extra risk. That’s because the favourable attention they get in the limelight pushes up investor expectations. When these stocks fail to live up to those heightened expectations, as almost inevitably happens, stock prices can plunge.

Themes revolve around predictions. That’s the hardest way to make investment decisions, and it is likely to lead to expensive mistakes. That’s why we focus on well-established companies. You can spot these companies mainly by description, rather than prediction.

How to get started investing in the stock market: Focus on high-quality stocks, like blue chips

You can significantly reduce the times when you really need to sell by consistently buying well-established, high-quality stocks. These stocks can still drop sharply when the economy falters or bad news strikes, of course. But these are the stocks that snap back quickest and most reliably when the trend reverses and bad news comes less often. That’s why it generally pays to hold on to stocks like these through market setbacks.

We feel most investors should hold the largest part of their investment portfolios in securities from blue chip companies. All these stocks should offer good “value”—that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Ideally, they should also have above average-growth prospects in expanding markets.

The best blue chips offer both capital gains growth potential and regular dividend income. The dividend yield is certainly one of the most concrete indicators of a sound investment. It is the percentage you get when you divide the current yearly dividend payment by the share or unit price of the investment. It’s an indicator we pay especially close attention to when we select stocks to recommend in our investment newsletters.

What additional tips do you have for beginning investors?

What do you wish you had known about investing before you bought your first stocks?