So, you've followed the rules of prudent investing, buying fixed-income vehicles to protect your portfolio against the next market meltdown, a healthy mix of blue-chip equities and multiple global regions to limit risk.
Now, the fun part.
While portfolio strategies often include diversifying to reduce risk, diversifying risk itself often goes overlooked. That means balancing safe investments with riskier ones to maximize overall returns.
Brian Pow walks on the wild side of the market every day. As vice-president of research and an equity analyst at Acumen Capital Partners in Calgary, his job is to find good investments at low prices. "I'm good at finding stocks that are proven but not yet identified," he says.
One feather in his cap is Stella-Jones Inc., which manufactures industrial wood products such as hydro poles and railway ties. He bought the stock at $2.25 a share in 2005, and now it trades at more than $40.
He also bought software company Computer Modelling Group Ltd. at about the same time for 73 cents a share; it is now trading at $13. He took a hefty profit on Stella-Jones a few years ago but still owns Computer Modelling.
Not all of his investments end as well, but his basic advice to novice investors is to do their homework and stick to their plan. "Going into it you need a strategy so you know how to react. That's where the discipline comes in."
Investors looking for the next Google or Facebook should start with what they know, Mr. Pow says. "Look in your own backyard and consider your own experiences. In the case of Facebook, if you're an early adopter then you would say it makes sense. Is it something the masses would use?"
Finding clues from the financial statement of an upstart company can be challenging, since many might not turn a profit and some might not even generate revenue. Mr. Pow says a company's management can be a better indicator. "Look at insider ownership. If insiders are shareholders and they're not drawing big salaries from the company, their real take on the business is no different than [that of] shareholders, and that's always an encouraging sign," he says.
Another financial indicator he points to is the cash flow statement. "Does the company have enough cash flow to make all its payments?" Mr. Pow says. "When you're in the early days and there may be no revenue, and there are expenses, you just do the simple math on their monthly burn relative to their cash position."
Some investors put their money in a stock expecting it to climb on a one-time event, such as being acquired by a bigger company. But you need to be ready to bail if it doesn't happen. "It's difficult to admit to yourself that you've been wrong," he says. "You've got to pull the plug as quickly as you can."
Also, good stocks that take a hit because of a broader market decline could present an opportunity to buy more. "If the business isn't broken it's best to stay invested in what you know. If you understand your businesses well it's an unbelievable buying opportunity."
Finally, he cautions novice investors to work with an adviser. "They look at the market every day," and can keep an eye on speculative stocks.
Not everyone has the stomach for higher-risk investing. Toronto-based Toron AMI International Asset Management manages portfolios for people who want to forego market drama and ensure a return on their investments.
"There's a whole lot of stocks that don't interest us because there's not a lot of certainty around their cash flow, but they represent concepts and themes for someone trying to diversify into a higher risk scenario," says Karl Berger, a Toron partner.
Investors who want to roll the dice need to consider every possible outcome, he says, and whether they can deal with a worst-case scenario. "Everyone should be aware of their own situation and where they are in terms of stage of life," he says.
That's not to say Mr. Berger doesn't venture to the higher rungs of the risk ladder in his own investment portfolio. "For myself, I'm comfortable having 20 per cent of my portfolio in what I would classify as play money – themes, concepts – looking for the home run," he says.
He points to big paydays in the biotechnology sector as a result of scientific breakthroughs. "If you're looking at biotech you look at the space they are coming into with whatever drug they're working on, and what the market potential is if all kinds of things line up for them," he says.
A more common example of a rags-to-riches story is Apple, which hit the big time with its product line.
"At one stage Apple stock was hugely stretched in terms of its valuation because the market was assuming that there was going to be an incredible amount of innovation in what they were doing," Mr. Berger says. "You have to look at what they're doing and ask, 'What is in their pipeline? What is the next thing that is going to drive spectacular growth?'"
In the end, Mr. Berger considers speculative investing a leap of faith.
"There are tons of companies that have been success stories, and there are tons that have just never made it to the finish line," he says. "You don't hear about those as much."