Investors interested in how to make profit from stocks must consider stock quality and the right types of stocks for their portfolio. Learn more now.

There’s a large random element in the stock market, as in human activity generally. If you react to stock-price changes impulsively or emotionally, you multiply the effect of that random factor.

It’s also a mistake to buy or sell stocks just because they have gone up or down. That’s because of the large unpredictable element in stock-price direction. Investing in a random fashion almost inevitably costs you money in the long term.

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How to make profit from stocks? Add lower-risk investments to a conservative portfolio

Lower-risk investments equate to safer investments. For conservative investing, focus on investing in high-quality stocks that also offer hidden value.

Well-established companies are the key to profitable and lower-risk investments. Instead of moving between extremes of risk, we continue to think investors will profit most—and with the least risk—by buying shares of well-established companies with strong business prospects and strong positions in healthy industries. That’s not to say that there won’t be surprises that affect every company in a particular industry. But well-established, safety-conscious stocks have the asset size and the financial clout—including sound balance sheets and strong cash flow—to weather market downturns or changing industry conditions.

Learn how to make profit from stocks by spotting the best long-term stocks to buy and hold

Often, the decision to abandon a buy-and-hold strategy seems to crop up when the market is down or at least in a state of turmoil that leaves investors uncertain.

For decades—as long as I’ve been involved with the stock market—some brokers have claimed that they favour the “buy and hold” investing strategy in principle, except when the market was so treacherous and unpredictable that their clients had to indulge in short-term trading, options or whatever to make any money.

Brokers have powerful financial incentives to recommend this kind of switch. The alternate investing methods they recommend involve higher fees. These fees leave their clients far less likely to make significant profits, but they virtually guarantee that the broker’s income will go way up.

Savvy investors generally resist this switch. They recognize that you can’t predict market swings, but you can profit from long-term growth in the economy, and from the wealth creation that takes place in well-established companies. However, some investors can become more receptive to the idea in the late stages of a market downturn, when the “alternative strategies” have beaten “buy and hold” for a year or two.

The funny thing about all this is that “the traditional buy-and-hold strategy” is written about much more than it is practiced by most investors.

How to make profit from stocks: Invest in some income stocks

Even if you don’t need current income from your portfolio, you still may want to invest in income stocks. When you pick the best income stocks, you are, for the most part, investing in safer and more secure companies. That’s in large part because of the sustainable dividends that the best income stocks pay. Dividends, after all, are much more stable than earnings projections. More importantly, dividends are impossible to fake—either the company has the cash to pay dividends or it doesn’t.

At the same time, it’s important to avoid judging a company based solely on its dividend yield. That’s because a high yield can sometimes be a danger sign rather than a bargain. For example, a company’s dividend yield could be high simply because its share price has dropped sharply (because you use a company’s share price to calculate yield). That can be a sign of an imminent dividend cut.

Learn how to make profit from stocks by applying our 5% to 10% rule 

Every case is different, because each individual has different investment objectives, acceptable risk levels and so on. But you should generally hold on to high-quality stocks, even if they have doubled in price. However, you may want to consider selling part of successful conservative stocks you own if they go way up and come to make up too much of your portfolio—say, more than 8% to 10%. In that case, it may make sense to take partial profits.

In investing for our clients, we rarely put much more than 5% of a portfolio into any one stock. But if a stock does so well that it comes to represent 10% of a client’s portfolio, we at least consider selling part of it, to cut the risk. However, as mentioned, every case is different.

You also need to consider your diversification across the five main economic sectors. If your exposure to the Resources sector is too high, then you may want to sell some of your Resource holdings, to cut risk.

Use our three-part Successful Investor approach to find long-term stocks to buy and hold 

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight. 

Some believe that frequency trading has ruined the stock market. What are your thoughts on this?

Do you find holding stocks long-term is the best way to make a profit, or do you think trying to time the market brings in more profits?