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Most funds take a balanced approach to portfolio building, but some invest exclusively in equities and a few focus on bonds.

The biggest asset bubbles are well grounded in reasonable premises. The equity bubble in the 1990s was founded on the absolutely correct potential for technology to transform our lives. It reaches a point, however, where investment assets come in faster than they can be spent wisely, which is how we get megacap network equipment stocks trading at 150 times trailing earnings.

I don't think we're at the 'It's gonna blow!' stage for dividend and income stocks – valuations are not insanely stretched – but I also think the easy money has been made and it's time to steadily lighten up a bit.

The domestic housing situation is another example. Canadians have racked up a record amount of debt on the accurate assumption that housing values will continue rising. And like dividend stocks, it's difficult to assess where we are in the housing cycle. Restrictions on both foreign investment and mortgage requirements may have tipped the balance towards price declines in Vancouver, but prices in Greater Toronto Area have continued to soar.

Moody's recently released a report indicating that the country as a whole would avoid sharp declines in real estate values. It's also the case that because of record low mortgage rates, affordability ratios in much of the country – monthly payments as a percentage of income – remain within historically normal ranges, even if younger Canadians are largely priced out of most major markets.

Paraphrasing the movie Fight Club, rallies go on as long as they have to, and picking market tops has always been a mug's game. There is a stage in market trends, however, where the potential upside is less than the amount the asset will decline in the inevitable correction. The time to protect against that is well before the market turn.

As I mentioned, valuation levels in dividend stocks are, on average, not excessive. I'd suggest however, that investors check their holdings in income generating sectors and take profits where prices are significantly higher than historical averages.

In housing markets, taking profits is not anywhere near as straightforward, but I'd suggest it's not the time to speculate by flipping a home or buying a second residence to rent, even while mortgage costs are low.

In both cases, the top of the market may be years away, but investors are really not going to want to be massively overweight these sectors when it happens.

-- Scott Barlow

Three big numbers to note

$1.25 Canadian National Railway's adjusted third-quarter earnings per share, which were reported after market close on Tuesday. This beat market expectations of $1.22, but revenue was slightly below market forecasts.

$1.67. Apple's fiscal fourth quarter earnings per share. The Street was expecting $1.66.

75.3% The percentage of the 150 S&P 500 stocks that have reported third-quarter earnings that have beaten analyst expectations. That's above the long-term average of 63.5 per cent.

Stocks to ponder

ProMetic Life Sciences Inc.  This stock has 10 'buy' calls and analysts forecast it could rise by more than 60 per cent in the next year, writes Jennifer Dowty. Quebec-based ProMetic is in the business of extraction and purification of proteins from human plasma. While ProMetic doesn't currently pay a dividend, analysts see the company boosting revenues in the next few years, and forecast it will report positive earnings per share by the year 2018.

True North Commercial REIT. Gordon Pape likes this real estate investment trust as it yields 9.2 per cent, even though it has a higher risk rating. The great majority of the REIT's properties are leased to governments, providing a safe, dependable flow of income. The risks include higher interest rates, which would have a negative impact on the whole sector, and the other is that it is a very small operation.

Hudson's Bay Co.  Portfolio manager Gabriel Lowenberg says he's been shopping at HBC, and buying this retail stock. But is it really a retailer or a huge landlord with a massive real estate portfolio? He says the retailer could extract the value of its real estate portfolio by spinning that off and creating a real estate investment trust, similar to what Canadian Tire and Loblaw Cos. have done recently, and HBC shareholders would be rewarded.

New Flyer Industries. This dividend stock has five 'buy' calls and a 32 per cent upside forecast, writes Jennifer Dowty. Winnipeg-based New Flyer is North America's largest transit bus manufacturer, and motor coach maker and parts supplier. Its posted better-than-expected earnings in its most recent report, but in October it trimmed its aftermarket parts revenue guidance. Its yield is 2.5 per cent, or 95 cents per year, and its has been a strong long-term performer.

Colabor Group Inc.
What Fabrice Taylor likes about turnaround investments is that they offer the kind of returns you expect from speculative high-growth ideas, but at half the risk. The exciting growth stories can work out, but they have an almost equal tendency to cause head trauma. Turnarounds, by contrast, offer a steady increase in capital that rarely surprises to the negative once the recovery gains traction. His stock pick is Colabor Group Inc., a Quebec-based food distributor. It operates in a boring but stable industry for which demand will never go away. Meanwhile, check out this article on how Fabrice Taylor goes about picking a turnaround stock.

The Rundown

Some of the brightest young Canadian minds think these are the two stocks to buy
At a fall conference last year, the Association of Canadian Intercollegiate Investment Clubs (ACIIC) held its annual Stock Pitch Competition – a challenge in which contestants make their case for one stock to a panel of industry professionals. The winning picks have done well since then: They are up an average 12 per cent, ahead of the 7.5-per-cent gain in the iShares Core S&P/TSX Capped Composite Index ETF. This year's conference just wrapped up with top stock pick being Interface Inc., followed by Cineplex Inc., writes Larry MacDonald.

Profit growth set to return for Canadian companies
Corporate Canada is on track to exit the profits recession that has ravaged income statements for nearly two years, writes Tim Shufelt. The consensus forecast for third-quarter earnings is for year-over-year profit growth of nearly 5 per cent for companies in the S&P/TSX composite index, according to National Bank Financial. The rebound in energy prices, combined with brutal cost-cutting in the oil patch, are generating an energy-led recovery in Canadian profits, which last saw growth in late 2014. As a result, no major stock index in the developed world has done better this year than the S&P/TSX composite, which has risen by nearly 15 per cent.

The ABCs of building an RESP using ETFs
Just a little schooling can help you achieve a higher grade of investment returns in a registered education savings plan, writes Rob Carrick. And ETFs are a good idea because they're simple to use, cheap to own and likely to produce returns that compare well with mutual funds and portfolios of hand-picked stocks, bonds and guaranteed investment certificates. Justin Bender, a portfolio manager with PWL Capital, says you can build an effective portfolio with just three funds: Vanguard FTSE Canada All Cap Index ETF (VCN); iShares Core MSCI All Country World ex Canada Index ETF (XAW); BMO Aggregate Bond Index ETF (ZAG).

This investor has a higher-risk, equity-heavy strategy
Urszula Adamik has 35 per cent of her portfolio in stocks she picks, and 55 per cent in ETFs because she has a high risk tolerance and a pension plan at work. She also likes investing in smaller companies tackling issues she believes in such as technological advancement or community development.

The value investor's strategy for choosing the right stocks
Value investing is all about stock picking. It involves a process that helps investors find and buy stocks that trade significantly below intrinsic value. But what principles do value investors adhere to which help them in this process? There are three key principles value investors believe in, writes George Athanassakos. First, value investors believe that when they buy a stock, they do not buy a piece of paper. They buy a piece of the company. Second, value investors believe that the stock market moves up or down many times irrespective of fundamentals. Third, value investors always look for a margin of safety. These are the principles that help value investors outperform.

Beware the dangers of bank-issued preferred shares
Some advice for Canadians searching for yield: Before buying another bank-issued preferred share, study the drama unfolding at some of Europe's biggest financial institutions, writes Tim Kiladze. For the past few years, Canadians have been eager to gobble up new preferred-share issues sold by the country's largest lenders. These offerings often promise annual yields between 4 per cent and 5 per cent – juicy returns in an era of rock-bottom interest rates. Banks like selling these securities because they are structured in such a way to count as capital that can cushion against bad loans and losses. The shares carry a clause that states they can be converted to common equity in an emergency – earning them the label of non-viability contingent capital (NVCC). However, it is nearly impossible to predict the future. The current action in Europe shows how risks can emerge.

Nervous about the market? Try these mutual funds
Stock markets have been holding up surprisingly well but that hasn't stopped a lot of people from fretting about possible troubles ahead, writes Gordon Pape. No wonder. They say that markets always climb a wall of worry and there's plenty of that around right now. Growth estimates are being reduced, both in Canada and elsewhere. World trade is slowing. The early effects of Brexit are starting to be felt in the United Kingdom. Wallonia has undercut our trade deal with Europe (Wallonia? Really?). Then there's Donald Trump. If you're not feeling a little uneasy, you're not paying attention. He suggests two mutual funds designed with the nervous investor in mind: TD Advantage Balanced Income Portfolio and the Steadyhand Founders Fund.

Three stocks that Buffett and Lynch would like
If only they had seen it coming. Investors often regret missing out on the Apple or Costco or FedEx that could have turned their $10,000 nest eggs into million-dollar lottery jackpots had they simply recognized the opportunity early and stuck with it, writes John Reese. It's easy to judge stocks by their past performance. Twenty years ago, Apple traded at less than $1 (U.S.); now, it's north of $117. Costco shares have gone from approximately $12 to $149 over the same time, and Monster Beverage from 8 cents to $147. These all look like solid gold performers. What investors tend to overlook, however, is the volatile journey these stocks – and these companies – have had over time. But successful long-term investing is less about finding the next big thing and more about finding well-run businesses with reliable returns and not overpaying when buying those stocks. Here are three stocks that fit the styles of Warren Buffett and Peter Lynch: United HealthGroup, Ingersoll Rand and Wells Fargo.

Contra Guys: The fallacy of perfectly efficient markets
Back in the day when Benj Gallander was doing his MBA at Dalhousie University, his views conflicted with a professor who was a believer in the "efficient market hypothesis (EMH)," also known as "perfectly efficient markets." Mr. Gallander was more obstreperous then and since he had been investing successfully for a number of years and read scads of literature on the subject, he chose to argue rather forcefully with his teacher. The EMH argues that stocks always trade at their fair value as they reflect all available information – it is impossible to beat the market over the long term unless one has insider information or takes on excessive risk. They go on to say exactly what flaws they see in the efficient market hypothesis.

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What's up in the days ahead

Our resident dividend investor, John Heinzl, explains why the McDonald's recovery is a mirage. Our equities analyst Jennifer Dowty will highlight a few stocks where recent selling pressure has created buying opportunities. And our personal finance guru Rob Carrick will identify who the best candidates are to use a robo-adviser.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Gillian Livingston

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