Here are some key tips on how to buy U.S. stocks to benefit from both diversification and some of the market’s strongest, highest-quality stocks

The U.S. market gives you access to many of the world’s top stocks. These stocks come in a range of sizes and quality that’s largely unavailable in Canada, but we confine our recommendations to the highest-quality U.S. stocks.

We recommend that Canadian investors have as much as, say, 20% to 30% of their portfolios in U.S. stocks in order to improve the diversification and growth potential of their investments. Here are some tips on how to buy U.S. stocks to maximize your portfolio gains.

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When buying a U.S. stock, would it have to then increase 34% to cover the exchange rate before you realize any gains?

When buying a U.S. stock, it would not have to increase 34% to cover the exchange rate before gains are realized. That’s because you pay more in Canadian dollars when you buy U.S. stocks, but you get more Canadian dollars back when you sell.

Let’s say you want to buy a U.S. stock trading at $100 U.S.

This would cost you $134 in Canadian dollars at today’s exchange rate.

Let’s say the stock rose 5%, to $105 U.S.

If you sold it, and the exchange rate remained the same, you would get $140.70 in Canadian dollars.

That’s also an increase of 5%.

At the same time, exchange rates do change. If the value of the U.S. dollar rises in relation to the Canadian dollar while you hold a U.S. stock, then you would get more Canadian dollars back when you sell than if the exchange rate had remained the same.

On the other hand, if the value of the U.S. dollar falls in relation to the Canadian dollar while you hold a U.S. stock, then you would get fewer Canadian dollars back when you sell than if the exchange rate had remained the same.

Uncertainty over the direction of the U.S./Canadian exchange rate may seem like a risk factor. However, we see holding U.S. stocks in your portfolio, and thereby gaining U.S. dollar exposure, as a long-term plus. It’s a valuable form of diversification.

Look beyond a single investment factor when considering how to buy U.S. stocks to make safer picks

When they look for stocks to buy, investors sometimes fall into a habit of focusing on those with a particularly attractive reading on a single investment measure. These readings include a low per-share ratio of price-to-earnings, a low price-to-book-value ratio, or a high dividend yield. This seems like a quick, easy way of spotting an investment bargain.

However, most investment measures fall on a spectrum that ranges from suspiciously cheap to extraordinarily expensive.

For example, suppose you decide you will only consider buying stocks with a per-share price-to-earnings ratio of 10.0 or less. That way, you hope to get more earnings for each dollar you invest. But the “e” or earnings in the p/e only covers earnings, or an earnings estimate, for a single year. The year your low p/e covers may coincide with a peak in the company’s earnings, for any number of reasons.

One key reason is that many disasters-in-waiting go through a low-p/e period prior to their eventual collapse. During this low-p/e period, people close to or involved with the company recognize that it has serious problems. They sell their own holdings and they tell their friends and relations to do the same.

Here are four key pointers on how to buy U.S. stocks for better long-term results

1. To get any real value out of any investment measure, p/e’s included, you need to look at them in the context of everything else that’s going on in the market and in individual stocks.
2. Most investment measures fall on a spectrum that ranges from suspiciously cheap to extraordinarily expensive.
3. It’s a mistake to focus on stocks in the “suspiciously cheap” end of the p/e spectrum. It’s also a mistake to reject stocks out of hand, just because their high p/e’s make them seem too expensive.
4. Most investors, most of the time, will find their best opportunities in the middle of the spectrum, far from the extremes of suspiciously cheap to extraordinarily expensive.

Learn how to buy U.S. stocks using our three-part Successful Investor approach and make more long-term profits

1. Invest mainly in well-established, dividend-paying 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 overpriced, 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.

How has volatility in the U.S. markets and politics affected your interest in U.S. stocks?