Stock market investing can be stressful and intimidating at any age. It’s just hard to part with our money given the uncertainties that exist. However, if we follow a few guiding principles, we can confidently start investing, and even beginners can begin to see their wealth grow.
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Diversification is key
As we have all heard many times, diversification really does lower the risk of a portfolio. It’s impossible to never be wrong about a stock. If you have a basket of stocks, however, the rest of your holdings can make up for your mistakes. This is why having a basket of stocks takes the pressure off, and shields your portfolio from catastrophic losses.
In order to build this diversified portfolio, I would start with the different sectors that I would want to be exposed to. In effect, I want exposure to a wide variety of sectors that are not correlated with each other so that at any given time, something is working.
For example, I want exposure to the safe and defensive utilities sector. This gives me predictability, dividends, and security. I also want exposure to the energy industry. Even though this is a cyclical industry, there are some long-term tailwinds propping up many of these companies.
Fortis (TSX:FTS) is a good utility stock to own. Backed by a 50-year history of dividend growth, Fortis stock has generated significant shareholder value over the years. It’s a predictable company that benefits from the fact that its utility businesses are government regulated. This guarantees a certain rate of return and ensures predictability.
Searching the stock market for strong fundamentals
Another very important thing to look for when investing in the stock market is quality. This means looking for companies that have strong fundamentals. This leads us to companies that have a healthy competitive advantage and market position, a solid balance sheet, and good growth ahead.
For example, Toronto-Dominion Bank (TSX:TD) is a high-quality Canadian bank that has stood the test of time. Over the last 10 years, TD Bank’s stock price has increased 68%. Also, the TD Bank has paid out $27.58 per share in dividends over this time period.
Predictable, repeatable businesses
A business that can generate repeatable business over the long term is a good business. This reduces the risk profile of a company and puts the company in a position where it can focus on improving the business and shareholder returns.
For example, Waste Connections (TSX:WCN) is one such company. It provides waste collection, disposal and recycling services in the U.S. and Canada. It also provides a lucrative, defensive, and rapidly growing business for investors who are looking for dividends and growth.
The waste services business is a highly essential and predictable one. Consequently, Waste Connections stock has been a steady performer over the long term, as you can see in the graph above.
Stock market high-flyers
Lastly, any portfolio should also include a small weighting in higher-risk/higher-reward stocks. This weighing can be anywhere between 5% to 10%, depending on your risk tolerance. These stocks are risky but the potential returns are really life changing.
An example of this type of stock is Well Health Technologies (TSX:WELL), an omni-channel digital health company, offering digital healthcare solutions globally. This company is rapidly growing as it digitizes healthcare, so there’s a lot of potential. However, today, it’s registering net losses and embarking on an aggressive growth strategy, which makes it a risky investment.
The bottom line
In summary, try to build a portfolio of high-quality stocks from a variety of industries in order to get the benefit of diversification. Start by depositing a certain percent of your monthly pay in an investment account, watch it grow, and then start buying the best stocks you can find in the stock market.
