3 Investing Tricks Canadians Can Use to Make Great Stock Choices

These tricks can help get you started when identifying how to choose great stocks and where to even begin.

| More on:
stock data

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Tricks can be misleading when it comes to investing in the market. But there are certainly tricks that Motley Fool investors can use when it comes to choosing the right stocks — especially now, when the market may be down but remains volatile.

A market correction of 10.8% occurred on the TSX this year from peak to trough. Yet, as of writing, shares have come up over 5%. That leaves little time for those wanting in on cheap prices believing there won’t be another correction.

So, before you dive in to any growth stock out there, use these tricks to help guide you towards strong long-term choices.

Trick #1: Rule of 72

The Rule of 72 is fairly simple. Motley Fool investors simply divide 72 by the average annual growth for each year of the stock they are interested in. What you’ll get is the likely amount of years it will take for your investment to double.

For example, let’s look at a strong long-term company like Fortis (TSX:FTS)(NYSE:FTS). Fortis stock has a decade-long compound annual growth rate of 7%. If you divide 72 by seven, you get about 10 years. So, it will take about another decade for you to see your shares double.

The problem, of course, is using this when looking at growth stocks. A company that is over 10 years old should give you a strong suggestion of future performance. If a company is less than a decade old, I would stay away from using this trick.

Trick #2: The Rule of 100

A rule that’s gone around for a while is the 100 rule. In this, you take your age away from 100. The resulting two numbers will tell you how much you should have invested in equities, and how much should be in something very safe like bonds or guaranteed investment certificates (GIC).

In my case, I’m 32. So, for me, that would mean I could have 32% of my portfolio in bonds and 68% in equities. Again, this is a good jumping-off point to demonstrate that I have decades to see my shares grow. But, of course, my equities would also include safe long-term options.

Trick #3: The 10% rule

If you’re new at investing, you likely aren’t looking at your stocks every second of the day. Nor should you have to! But right now, things are easy. Practically everything is down — in some cases by over 10%. And that 10% rule could be just what you need to get started.

It can be a tough pill to swallow, but that’s why historical performance is so important. Let’s use a Big Six bank like Bank of Montreal (TSX:BMO)(NYSE:BMO) as an example. The bank is down 10% since highs in March. It’s a Big Six bank, so its provisions for loan losses has meant that it continues to bring in revenue and profit. Furthermore, shares are up 5% during the last few weeks after the market correction.

But the number you can focus in on here is 10%. It’s still down by 10%, offering you an additional growth opportunity of 10% to reach pre-correction heights. Then it could continue to achieve the average annual growth it’s seen over the last few years.

So, now you get quick returns with shares so low and are invested in a stock you can hold for decades, knowing it will achieve solid growth.

Bottom line

These strategies can help Motley Fool investors make strong choices when it comes to choosing stocks. But, of course, they should by no means be the only decision makers. Meeting with your financial advisor can provide you with clarity to reach your own goals set by you.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends FORTIS INC.

More on Stocks for Beginners

Man holding magnifying glass over a document
Stocks for Beginners

The Valuation Conundrum: P/E Ratio vs. P/S Ratio

Did you buy a stock with low P/S ratio and make a loss? Most investors fall prey to the valuation…

Read more »

grow money, wealth build
Stocks for Beginners

5 Top Canadian Growth Stocks to Buy in July 2022

The second half of 2022 brings hope of recovery and fear of a recession. These mixed emotions have put growth…

Read more »

Stocks for Beginners

New Investors: 3 Top Dividend Stocks to Start a Simple Portfolio

These quality dividend stocks are worthy for new investors to consider for a simple passive-income portfolio.

Read more »

Make a choice, path to success, sign
Stocks for Beginners

New to Investing? Here’s How to Not Lose Money

One way to avoid losing money in the stock market is to stick to broad market index funds like iShares…

Read more »

Knowledge concept with quote written on wooden blocks
Stocks for Beginners

An Easy Way to Understand a Recession

Are recessions good or bad? It depends on how prepared you are for one. Here’s what a recession does to…

Read more »

analyze data
Stocks for Beginners

New Investors: Start a Portfolio With These 3 Stocks

Are you a new investor looking for stocks to add to your portfolio? Here are three top picks!

Read more »

protect, safe, trust
Stocks for Beginners

2 Safe Stocks Beginners Can Buy for Reliable Passive Income

If you are a beginner investor looking for safe, reliable passive income, I've got two TSX stocks you can rely…

Read more »

Stocks for Beginners

Investing Strategies for Canadians in an Uncertain Economy

These are uncertain times, as the economy grapples with high inflation. Here are four investing strategies for the current market.

Read more »