7 Smart Investing Tips From Kiplinger Readers

I learned about investing by interviewing hundreds of smart people over the years, from market strategists and analysts to fund managers and financial planners. But until I asked for some advice in my June column, I didn’t realize how much investment wisdom I could gain from my own readers.

More than 200 of you wrote in response to my question about how I should handle dividends for the purpose of measuring the results of my Practical Investing portfolio. Although most who wrote said that the performance of the portfolio as a whole is paramount, many of you said you like to see details about how each stock contributes. The best way to measure a stock’s perform­ance is to assume that any dividends it pays are reinvested in additional shares, regardless of whether the distributions are actually reinvested or taken as cash. Figuring out returns under those circumstances is tougher than it sounds, but I am testing tools that I hope will let me do that. Meanwhile, you can track the performance of my portfolio at kiplinger.com/links/practicalportfolio.

I want to share the insights I gleaned from your investing strategies, which turned out to be the real prize. Truth be told, I could fill a year’s worth of columns with your wisdom. But with limited space, I decided to focus on one topic, managing risk, to do your thoughts justice. Here are some of your nuggets:

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Invest in what you understand. Doing so allows you to avoid getting caught in stock-market bubbles and to remain (relatively) calm during a crash because you can better determine a company’s true worth.

Less debt means less risk. When choosing individual stocks, look closely at the company’s balance sheet. Too much debt hampers growth and a company’s ability to weather economic storms.

Use dividends to diversify your stock holdings. Instead of selling stocks to keep your portfolio in balance, take dividends in cash and use the proceeds to invest in sectors in which you have little or no exposure. This improves diversification without running the risk that you will incur a tax bill when you sell.

If you use funds, look under the hood. Owning a myriad of mutual funds doesn’t make you diversified when your funds own a lot of the same stocks. That’s a brutal lesson many learned during the 2000–02 bear market, during which many funds were caught holding overvalued blue-chip stocks and ridiculously priced dot-coms. It’s better to check your funds’ holdings before the market goes south to make sure your portfolio is as diversified as you think it is. The x-ray tool at Morningstar.com can help.

The right stock can replace a bond. With interest rates in the gutter, many readers have turned to high-yielding stocks to replace all or a portion of their bond holdings. But it’s important to keep a close tab on a company’s earnings and cash flow to make sure it can afford to keep paying—and, better yet, raising—those dividends.

Cash isn’t trash. Even if it pays nothing, cash can be useful. Keep some on hand to take advantage of market downturns. We haven’t had a stock-market correction of as much as 10% since late 2011. We’re overdue (see How to Survive a 10% Correction).

Patience is a virtue. Not every stock takes off like a rocket, even in a bull market. Whether due to industry or company-specific issues, even stocks of great outfits can stall. Because they’re long-term investors, most Kiplinger readers have learned that today’s stinker often turns into tomorrow’s rose.