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investor clinic

To be successful going it alone, you must learn how to build a diversified portfolio and manage emotions when the market tumbles.Brian Jackson


For years my broker talked me out of buying conservative, dividend-paying blue-chip stocks. Now I want to take the plunge and start buying my own stocks with a discount broker. I'm hesitating, though, because people are saying the market is in for a correction. When I look at the history of certain stocks you have recommended, it seems I should have bought six or 12 months ago. As a cautious investor, how do I know when it's the right time to invest?


First, any broker who talks you out of buying "conservative, dividend-paying blue-chip stocks" has to be viewed with suspicion. Numerous studies have demonstrated the solid long-term returns of dividend stocks – particularly stocks that raise their dividends regularly. What's more, dividend investing is largely a buy-and-hold strategy that keeps trading costs low. These benefits are widely known, so I can only speculate that your adviser may have been trying to steer you into investments that pay him or her a higher commission. Sadly, investment "advice" is often motivated more by the needs of the adviser than the client.

The decision to go it alone should not be taken lightly: To be successful, you must learn how to build a diversified portfolio and manage your emotions when the market inevitably tumbles. I have heard from many readers who have made the transition and never looked back, but they all have one thing in common: They put in the time to learn.

Dividend investing isn't the only approach that works, but it offers several advantages for small investors. First, dividend-paying companies tend to be well-established, profitable businesses, which puts them on the conservative end of the risk scale (although they are certainly not risk-free). Second, when investors receive a dividend, it rewards them for staying the course, which is especially important in turbulent times. Third, when a company increases its dividend, it sends an easy-to-understand signal that a business is moving in the right direction.

In my Strategy Lab articles, I write frequently about dividend stocks that I believe are attractive long-term investments. I also maintain a model dividend portfolio so readers can see the strategy in action.

It's true that dividend stocks have enjoyed exceptionally strong gains recently. My model portfolio posted a total return of almost 18 per cent through the first seven months of 2016 alone. But does this mean you should stay out of the market until a correction hits? Not necessarily. It's worth remembering that early in 2016, plenty of market pundits were also calling for a correction, but stocks surged instead. If you stay on the sidelines hoping for a better entry point, the correction could come tomorrow – or a year from now.

Consider, too, that if you're buying an individual stock, you're not betting on the general direction of the market; rather, you're investing in a business. Instead of worrying about what may happen to the company's share price in the short term, I suggest that you focus on the company's long-term prospects. If its earnings and dividends are growing steadily, the share price will likely be substantially higher five or 10 years from now, which is what really matters.

If you have a quantity of cash to invest, studies have shown that putting the entire lump sum to work produces higher returns, on average, than investing in stages. (I discussed two such studies here.) The reason for this is simple: The market tends to rise over time, so you are usually better off having all of your money invested. The exception, of course, is if the market goes for a tumble; in that case, you would be better off investing gradually because you would not be fully exposed to the sell-off.

If going all in makes you nervous, there is nothing wrong with investing a portion of your money now and spreading the rest over, say, six months or a year. If stock prices rise, you'll feel good knowing that at least part of your capital is invested; if stock prices fall, you'll be glad you held back some of your capital to invest at lower prices.

Above all, you must focus on the quality of the companies you buy and remember that short-term price movements are usually nothing more than noise. A solid, well-run company will reward you with a rising dividend and, ultimately, a higher share price. If you lack the knowledge or confidence to invest in individual companies, you should consider low-cost exchange-traded funds. (My colleague Rob Carrick surveyed Canadian dividend ETFs here and PWL Capital wrote a helpful paper here.)

After working with an adviser for years, most investors would probably feel anxious about venturing out on their own. But I hear from people almost every day who are doing it successfully, and if you are prepared to do some work, you can, too.