In the world of investing, picking stocks which will outperform over a long time frame is perhaps one of the most difficult tasks of all.
Even if investors are able to avoid some of the common pitfalls of investing, including investing too much of one’s life savings in one geographic area (i.e. having a “Canada-only” bias), having the right portfolio of stocks, or level of diversification, as well as an appropriate mix of income based on the needs of said investor, are difficult goals to manage coincidentally.
In terms of diversification, investors ought to consider stocks which are negatively correlated with one another; in other words, buying companies which have little to do with each other (different industries, different countries/currencies, etc.) allows an investor to smooth out his or her gains or losses in a given period, given the fact that some of his or her stocks increase when others decrease, and vice versa.
By having a portfolio of companies with as much diversification as possible, an investor can approximate the risk profile of the broader market, thereby improving the risk/reward profile of said portfolio over long periods of time.
Additionally, by picking stocks which pay a dividend, and which grow their dividends over time, investors have the ability to both increase their income stream over time as well as reduce their reliance on capital appreciation in the long term.
These two very simple investment philosophies have remained fundamental to many of the most iconic long-term investors of all time, and for good reason.
Invest wisely, my friends.
