Choosing good Canadian stocks for your well-diversified retirement portfolio will lead to a more financially secure retirement

If you’re heading into retirement and are short of money, you should move your investing in the direction of safer, more conservative investments. That’s a far better option than taking one last gamble.

Saving for retirement should involve good Canadian stocks, portfolio diversification, and the appropriate use of a Registered Retirement Savings Plan (RRSP).

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Use a portfolio diversification approach with strong potential for long-term gains for retirement success

If you diversify as we advise across the five sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities) you improve your chances of making money over long periods, no matter what happens in the market.

For example, manufacturing stocks may suffer if raw-material prices rise, but in that case your Resources stocks will gain. Rising wages can put pressure on manufacturers, but your Consumer stocks should do better as workers spend more.

If borrowers can’t pay back their loans, your Finance stocks will suffer. But high default rates usually lead to lower interest rates, which push up the value of your Utilities stocks.

As part of their portfolio diversification strategy, most investors should have investments in most, if not all, of these five sectors. The proper proportions for you depend on your temperament and circumstances.

For example, conservative or income-seeking investors may want to emphasize utilities and Canadian banks in their portfolio diversification, because of these stocks’ high and generally secure dividends.

More aggressive investors might want to increase their portfolio weightings in Resources or Manufacturing stocks. However, you’ll want to spread your Resource holdings out among oil and gas, metals and other Resources stocks for diversification and exposure to a number of areas.

Put good Canadian stocks in your RRSP for more reliable retirement savings

An RRSP is a tax shelter used in Canada for retirement savings.

You can put money in RRSP tax shelters each year (up to a limit based on your income) and deduct it from your taxable income. You only pay income tax on your contribution, and the income it earns, when you make withdrawals from your RRSP.

The tax treatment of RRSPs is what sets them apart from other investment accounts. Ottawa created RRSP tax shelters to let Canadians invest money on a tax-deferred basis, presumably for retirement.

Note that it’s best to hold speculative and aggressive stocks outside your RRSP. Losses are more common with aggressive investments, and very possible with speculative stocks. If you hold them outside your RRSP, the losses provide you with tax-deductible capital losses that can reduce your payable capital gains tax. Inside your RRSP, losses simply reduce the capital you have available to take advantage of an RRSP’s tax-deferral power.

Find good Canadian stocks to invest in, expect to pay appropriately, and you’ll be rewarded with stocks that as a group should continue to rise

For many investors, buying stocks involves a two-part decision. First, they decide which ones to buy, then they decide what price they want to pay. Most want to buy, say, 5% to 10% below current prices.

These investors often explain that they are simply looking to buy stocks like a smart consumer buys a car. However, the stock market is more efficient than the car market, as an economist would put it. To get a lower price on a stock, you have to wait for its price to come down.

If you always try to buy below the market, you’ll always get a “fill” on stocks with hidden flaws. They’ll always come down into your buying range…and they’ll keep on falling.

But you’ll never get to buy the other kind of stock—the kind that keeps going up. They’ll always seem too expensive, and they’ll go on to get even more expensive. But you need a few of these ever-more expensive stocks to offset the losses from those that get cheaper and cheaper.

Use our three-part Successful Investor approach to find good Canadian stocks

We believe that high-quality stocks are your best protection in a portfolio. To find those stocks, and build a sound portfolio, start with our Successful Investor philosophy:

1. Invest mainly in high-quality, well-established companies, with a history of earnings if not dividends;
2. Diversify across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
3. Downplay or stay out of stocks that are in the broker/media limelight.

“Buy and hold” is a bad way to describe what we recommend. We prefer “buy and watch closely.” We think frequent trading is apt to make money for your broker, not you.

Obviously, it is easier to hold high-quality stocks that perform well over time. But we do not recommend that you hold indefinitely.

We advise selling particular stocks when we feel the situation has changed and they no longer qualify as high-quality investments. We also sell if we decide that a stock isn’t as high-quality or well-established as it needs to be to cope with the challenges it faces. Of course, many of our sales are due to a successful takeover of a company’s stock, which generally results in a major profit.

What stocks do you focus on most for your retirement portfolio building?

How has your retirement investing changed over the years?