Portfolio planning for future profits

Three factors will affect most of your investment strategy this year: the COVID-19 pandemic, plunging oil prices and the US presidential election.


Portfolio planning should contemplate the impact of COVID-19, oil prices and US presidential politics on your investments.

Investors should look forward to a positive performance for stocks in the coming years. That said, it’s also important to note that stocks don’t go straight up nor straight down.

Normally over time, stock prices tend to rise for a while, followed by a flat-trend, correction or bear market, before they move up again.

The coronavirus and the oil-price war worry many investors today. And even if these two events start to ease up by the end of the year, market volatility may well still be elevated as the US engages in a contentious election. For these reasons, it’s even more important to make an investment plan today and put it into action.

While our list of key Canadian and US stocks will help you set up a stable base for your portfolio, you should also have in place a plan that will regulate your purchases.

Of course, nobody likes to buy a stock today and watch it plummet in the weeks to follow. You’re probably all too familiar with this occurrence after the events of the past few weeks. In order to minimize the fallout from such events, follow this list of investment dos and don’ts. It should help you maintain an even keel in the anxious months ahead.

Do a budget. Before you spend any more money on investments this year, sit down and figure out just what your cash needs will be for the remainder of the year. You’ll want to know what your income will be and what purchases you will have to make in light of recent events. Will you purchase that new car, house or boat? Or should these expenses be deferred? Would it be better to pay down your mortgage faster? Will you be making RRSP contributions? And do you still plan to travel when things quieten down?

Money for these purposes should be kept as liquid as possible. Don’t use these funds to make short-term investments in stocks. You’ll only be taking a major risk with your capital and you could also incur heavy commission costs.

Prepare an investment strategy. With the money you have left over to invest, consider a strategy for 2020. We think some form of dollar-cost averaging should come in handy. Plan to space your purchases out over the next several months. That way, if prices do head lower from here, you’ll be in a position to pick up stocks at cheaper prices with higher yields. And if they do move higher, you’ll still be able to find bargains after the market bloodbath we’ve been through.

Stick with quality. If you have any doubts at all, stick with blue-chip stocks, such as those on our Key Stocks list, and spend the remainder of the year reinvesting your dividends. If you’re just starting a portfolio, build a solid base with quality stocks that pay good dividends. That way, you probably won’t lose as much money if the market moves down further.

Balance your portfolio. Spend an equal amount of money on each purchase if you can. This kind of balance allows you to minimize individual stock risk until you hold about 20 stocks or so in your portfolio.

When you reach this number, you can reinvest your dividends and buy more shares of these holdings on a gradual basis. This helps you in two ways: You stagger your purchases to minimize the impact of market downturns and you use dollar-cost averaging to take advantage of market drops.

Diversify. Make sure you not only have enough stocks in your portfolio to reduce individual stock risk but also be sure to diversify among different business sectors to help reduce industry risks. Right now, oil and gas stocks are a bargain. But prolonged low oil prices could lead to some bankruptcies in the sector. So limit your exposure to this sector and stick with the higher-quality names.

Be comfortable with the stocks you own. If you don’t have a reasonable understanding of the company in which you want to invest, don’t buy the stock at all.

This is an edited version of an article that was originally published for subscribers in the April 3, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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