If you’re an active do-it-yourself investor trying to pick your own stocks, recommendations from independent analysts can help. One good source is MoneySense’s in-house stock analyst Norm Rothery’s Top 200 stock ratings. His short list of Canadian All Stars combines favourable characteristics for both value and growth and has achieved an average annual return over 10 years of 17.2% (capital gains only, not counting dividends) for a period ending in late 2014.
While that impressive number far exceeds the returns for the market index and just about any mutual fund, it’s important to note that you still have further work to do in order to put together a fully diversified portfolio. The latest Canadian All Stars list in the December 2014 issue has nine stocks. To achieve a diversified portfolio, you’ll need to combine Canadian stocks with U.S. stocks and international stocks, while also covering off different sectors of the economy. Then you’ll need to add in a healthy dose of fixed income. While there is no one right asset allocation for everyone, for most people it’s a good idea to split their equity and fixed income somewhere between 40% and 60% each. If you’re building up the equity side of your portfolio entirely based on individual stocks instead of funds, it’s a good idea to try to spread your holdings fairly evenly among 30 or more individual stocks, so you’re not unduly impacted if serious misfortune happens to particularly impact one or two individual holdings (such as what happened to Nortel in the 2000s). In addition, you’re always advised to do your own due diligence on Norm’s picks.