When it comes to investing in the stock market, losing money can be an easy task.

Here are five guaranteed ways to screw up your portfolio, cause stress, and most importantly, not make any money. Avoid these and you are on your way to some quality long-term returns:

1) Continually trade in your portfolio every chance you get. Timing the market is very difficult. Unless you are a very experienced and / or very good day trader, this strategy often does not work. One of the problems, even if you make money, is that you are continually paying trading fees every time you pull the trigger on the trade. Even a trade at $9.95 is actually double, since you have to sell a stock and then buy a stock. Just like in the sporting world the saying goes, “Sometimes the best trade is the one you never make at all.”

2) Use investing advice in any popular magazine that showcases “hot” stocks. Once the magazine (which means the public) finds out about a really hot stock, the party is over. Magazines enjoy telling investors about great stock runs to the present, but are notoriously horrid at predicting the future.

3) Put your entire portfolio in money market, bonds and/or cash. I have more than one friend who is terrified of the stock market, frightened by real estate and one guy who’s even scared of most mutual funds! I imagine he sits around all day in his house, guarding his cash-stuffed mattress with a shotgun. He has most (if not all) of his money sitting in a money market account, getting 3 or 4 per cent interest per year. Some of it just sits in cash, earning less than 1 per cent! While it’s prudent to have cash on hand, it’s just a sitting place for your funds while in-between investments (even if it sits there for a whole year, waiting for that perfect bargain). Money market is not a great investment vehicle, because chances are that you will not even beat inflation over the course of your life with a money market account.

4) Go to a full-service broker. Maybe back in the 1960s this was a viable option, before the internet, ETFs, tons of investing blogs, magazines, newspapers and television shows all dedicated to investing. There’s no excuse to not take charge and cut out the full-service broker, who charges a substantial fee to look after your money. Don’t know anything about investing? Don’t like high-risk stocks? Don’t know where the market is headed? Buy a few balanced mutual funds (or diversified ETFs) and leave them alone.

5) Time The Market. All I can say is “good luck”. People continually try to time the market. It can be done, but none of the big investors who have made a fortune in the stock market advocate timing the market to any great extent. Besides, why lay awake at night worrying about it? Just carry a diversified portfolio (including cash) and then buy on the dips. Take advantage of a bear market by loading up. Unload a little bit and take some profits when things are going really well. There’s nothing worse and going for the home run, taking a big swing, and then missing the pitch and falling down at the plate.

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We’ve all seen the sign posted at the local business: “If you are happy with the service, tell others. If you are not… tell us!” The same kind of sign could be posted for investors. It would read, “If you are happy with your investments, tell others! If you ever make a mistake, tell no one.”It seems that the message boards and even casual conversations are filled with boastful stories about how my friend, me, my relative, or “they” are making a killing by investing in the latest great company, or hopping on board the China market three years ago, or buying Google when it was just a few dollars. I would love to visit a cocktail party where everyone is sharing their worst investing disasters ever. After all, investing is not an easy road, and it is definitely not a success-only journey.

I would like to invite you to post a comment and tell us (and others) about your worst investing mistake.

I’ll start: I was eighteen years old, and just opened a Scotiabank stock trading account. There wasn’t even internet trading back then, it was all done on the phone. I put $2,000 in my account, which was money I had accumulated from shoveling snow, working at McDonald’s and mowing lawns. It was basically my entire life savings. Instead of buying a car like my friends, I opened up a “self investing” account. I promptly bought one stock with all of my money: Afton Foods. I was drooling as I was reading through how to buy options, leverage out my position, and figured that I would easily double my money in the next 12 months. I was on my way! The stock was $1.25 a share when I bought it. Afton Foods was a very small Canadian donut / food store franchise that was on the grow! Six months later the stock was worth 90 cents, and then 60 cents, and then 25 cents. Eventually the company went bankrupt. It turns out they spent $3 million of their profit on a big “centralized call centre” in order to increase their customer service, but it only ate up their cash and infuriated the franchisees. They stopped paying their royalty money to the head office, law suits ensued, and eventually the house of cards collapsed and I owned shares that were literally worth one-half of one cent. And I couldn’t even sell them, since the stock had been suspended from trading. My biggest mistake was that I didn’t diversify enough—or even at all! Talk about all the eggs in one basket. My egg was crushed. If you only have $2,000, consider a mutual fund or an exchange-traded fund. The risk-reward ratio is just not in your favor with that small sum of cash. I welcome you to join the “mistake party” and tell us about your biggest errors!

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Are mutual funds dead? With all of the talk surrounding Exchange-Traded Funds over the past few years, I am starting to think that it’s starting to become an endangered species. Although there are way more mutual funds out in the market than ETFs, the popularity of mutual funds is waning while there has been explosive growth in the ETF arena over the past year or two. What’s the difference, and is one “better” than the other?

ETFs and mutual funds are similar in that they both hold baskets of securities. A balanced mutual fund might hold some bonds, T-bills, some stocks and even some cash. An ETF usually holds investments that track a specific index, such as the Dow Jones, S&P 500, the TSX Composite, or the domestic stock markets in any number of countries like China, Brazil or even the MSCI Emerging Markets Index.

The idea in both of these investments is that since you own a piece of many (like hundreds) of investments, your risk is reduced as opposed to owning only one or two companies.

The difference between ETFs and mutual funds is that mutual funds are “actively managed”, meaning that there’s a fund manger who buys and sells shares in the fund, renews bonds and T-bills, and decides on what the fund will own (within the mandate of the fund). For some mutual funds, like an “international equity” fund, the mandate is quite broad, while for others (“energy sector fund”) the types of stocks are somewhat limited.

The big knock against mutual funds is that they charge upwards of 2% a year in fees, known as the MER (management expense ratio). That means that each year, the fund takes 2% from you for their services. Vanguard’s ETFs, in comparison, have management expense ratios of less than one-half of one per cent, and in some cases as low as 0.08 per cent! Vanguard ETFs just hold your money in pre-defined investments (with negligible cash) and you either sink or swim, depending on how the market does.

That’s the one potential down side to an ETF: the risk. Many fund managers hold a larger portion in cash (like 5 to 20 per cent) in cash if they are certain that a market correction is coming. There is no “safety net” in ETFs—if the market (or index) that your ETF takes a nose dive, you are diving along with it.

Although there is no perfect way to predict future returns, a good way to gage the success of any mutual fund or ETF is to look at the 5-year history. Make sure the fund manager has not left (i.e. they have been there for the whole 5 years). With a mutual fund, you are investing in the manager as much as the sector or stocks. With an ETF, make sure to think long term (like 2 to 5 years). Remember, if you owned an ETF that invested in the Dow, the 1987 “huge” correction would be a tiny blip on an ever-increasing upward slope—and you would be saving management fees at the same time.

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We often see days where the Dow will surge ahead 200 or even 300 points in a single session. Then, the very next day, the same Dow will fall 150, 200, or more. The volatility is enough to make some people throw up their arms in disgust. Are the rate cuts over? Is there any more upside? Is a recession looming?

Imagine for a moment that you find the perfect company—it’s trading at a reasonable value, the growth prospects are amazing, the management looks terrific and you’ve poured over the financial reports and found a strong balance sheet, mouth-watering cash flows and hardly any debt. It looks like a buy! So you pull the trigger and buy a whole pile of shares. Then, a month later, you check back and the stock is down.

That could be a good thing.

What? Am I crazy? No way. Check out my example of how accumulating shares over the long run can actually help the average investor make stellar returns in the long run.

Let me state straight away that this is slightly different than dollar cost averaging, because in that model, you are buying more shares as the price drops. Here, we are just buying the same number of the shares but the price never falls.

For the example above, let’s use a share price of $10 so 100 shares is $1,000. You buy 100 shares next year, and every year for four more years. And, all during that time, the share goes up by 10% per year. Your investment would look like this:

Year 0: 100 shares costs $1,000
Year 1: 100 shares costs $1,100
Year 2: 100 shares costs $1,210
Year 3: 100 shares costs $1,331
Year 4: 100 shares costs $1,464

So now, at the end of Year 4, you own 500 shares and paid $6,105. The shares, during that time, went up 10% per year for 4 years.

But what if the shares flatlined for 4 years instead, and then jumped up 40% all at once? We would have accumulated $500 shares at a cost of $5,000 and then the whole group of shares would have jumped 40% in value. That means that your $5,000 would be worth $7,000 instead of the $6,105.

Is this plausible? Does that sort of thing happen? Yes—all the time. Companies fall off the radar screen of the big analysts, or many smaller companies take 5 years (or more) to even get on the radar screen of the big firms. So you could, in theory, be accumulating shares for years at a flatline price and then suddenly watch as it takes off.

This sort of strategy is also called “hockey stick” investing as you purchase shares along the shaft of the stick (a long, straight, flat line) and then suddenly ZIP! The shares pop up in price and the general world picks up on the great value of the company.

Instead of displaying an obscure, small and risky company, let’s go with a solid ETF that performed exactly the way described above: The China 25 Index FXI ishares ETF. For all of 2005 it traded flat. In 2006, it traded a little higher, and in 2007 it broke out with an 88% YTD return. If you had been accumulating before the break out, you would be swimming in returns right now.

That’s the trick: find the shaft of the hockey stick and accumulate, and enjoy the ride when the investors pour in… even if it’s years later. Some huge gains are made when investors ride that one good year of returns far off in the future.

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Cash Is King. We’ve heard that phrase bantered about, but it’s never more true than in investing. It’s important to remember why people should have cash in their portfolio and what it’s designed to do. Cash is the “least sexy” of the investments—after all, it just sits there, earning a pittance in interest, and you have no chance of seeing it double or triple. Why bother? Here are some compelling reasons to keep cash on hand in your portfolio.

1. Life Hands You A Curveball. Sometimes an emergency comes up in your life and you have to dip into your portfolio in order to handle it. Yes, we have all vowed to never touch our investing nest egg, but what if you were in a serious car accident and suddenly needed $10,000—right now? Instead of pulling money from a long-term asset, you can access a money market account and pull the cash out with a minimal (or no) fee.
2. The Market Crashes. The only thing worse than watching the market drop 700 points is watching it happen and not having any more money to buy more stocks. No matter how great the market seems to be going, there will be a day when everything goes in the tank. Having cash on hand to sweep in quickly when others are running for the exits is the easiest way to make money in the stock market.
3. Sleep At Night. Some people just don’t like risk, and as such part of their diversification should be cash. “Cash” means a money market fund, T-bills, or basically any interest-bearing security where you can get at it easily and quickly. Don’t discount this factor—there’s no point in earning tons of money if you are going to have be stressed out and no fun to live with.

How much cash should you have in your portfolio? Of course, it depends on your portfolio size, but I’ve always found that a few thousand (minimum) does the trick. You want enough on hand that you can buy 100 shares of a stock on your “watch list” if it dips considerably. That may be anywhere from $3,000 to $20,000, depending on the companies you are interested in and how bearish you are on the market’s future.

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We’ve heard it a million times from all of the financial gurus out there: buy low and sell high and you too can retire with huge mansion, multiple luxury automobiles and a stock portfolio that is mimicked by thousands of followers. While the advice may be simple, it is definitely not easy for the vast majority of us. But why? Shouldn’t it be easy to pick a stock that has fallen a great deal and then ride it all the way to the end of the rainbow?

The short answer is no. One of the reasons is that when a specific stock tanks or the overall market dips, it’s usually for a specific reason, or even a multitude of reasons—the stock missed their earning reports, competition is squeezing or eliminating profit margins, a recession is looming, interest rates were adjusted, or currency fluctuations on the international stage suddenly sent stocks jumping around. How are we supposed to manage all of these different factors? How can we even know if a stock is “low” or if it is “high”?

Many investors lament over not jumping into the “next big thing” only to watch it skyrocket—take the China stocks that have rallied over the past year for example, or the Uranium craze from a year earlier. We’ve all done it. Pull up any chart for any stock as start to mumble, “if only I’d bought a year ago (on the dip) and sold here (on the rise) and then bought again right after it bottomed out… I’d be a billionaire by now!”

Can we predict the future? The answer is definitely “yes”! The unfortunate news is that we just can’t predict it very well. We can definitely predict that a stock will, at some point during it’s run, become overvalued, while at some point it will probably become undervalued. If you are a trader (as opposed to a long-term investor), the trick is too buy it when it’s undervalued and sell it when it’s overvalued.

A stock is usually undervalued when it is not popular among the majority of investors—this is when more orders are put in to sell the stock then their are buyers at a particular price, and as a result the stock price drops. The trick for savvy investors is to disagree with the majority of the investors about the future of the stock… and to be right.

Ask yourself some key questions the next time the overall S&P market drops 300 or 400 points. Do you agree with the gloomy forecast? For example, is there really a recession coming? Will the U.S. dollar remain weak? Is the sub-prime mortgage meltdown completely over, or is there more pain on the horizon?

More specifically: if one of the stocks that you are tracking has pulled back because of the overall market and not because of any specific information that pertains to that individual stock, then it may be a buying opportunity. After all, if you really like a sweater at the mall, and then one day it’s on sale, wouldn’t that be a great time to buy it? You wouldn’t say, “The sweater’s on sale today. There’s no way I’m buying it! I’ll wait for the price to come back up first.”

Instead of industry-wide concerns that affect the stock market as a whole, the questions you ask can also be stock or company-specific. Do you agree with the analysts estimates that future earnings will be weak? Is the future of the company looking great, or are there stormy days ahead for the company on your “watch list”?

What about the overall market for the product? Competition for the product? Are there expansion issues, or even management issues? These are all variables that can affect whether the company will increase (or even continue) it’s earnings, and this will hopefully send the stock higher.

If you have a stock on your “watch list”, and the price has recently fallen but the fundamentals remain unchanged, then consider it a bargain and consider buying it. There are a few critical steps that must be taken before buying the stock:

- Print off the annual reports for the past two years and read through them. They are almost always available on the website. Don’t just pour over numbers, but read the plans for the company and check out what all of their products and markets are.

- Decide if the company is a long or a short-term hold. If it’s a short-term flip, then be diligent, put in a stop-loss order and also a sell order on the high side. Be disciplined instead of greedy and take the money if the stock reaches your sell price. If it’s a long-term hold, then buy it and tell yourself that you are not going to touch it for at a year (and hopefully two) unless there are radical changes in the company’s direction (NOT the overall market’s direction).

- Buy on the dip. “You make money when you buy, not when you sell”. This old saying has been used in the real estate business for decades. Wait for a short-term drop and pull the trigger.

Buying stocks takes guts—especially when it’s dropping. Do the research and make that decision based on intelligent risk calculation instead of guesswork.

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Do you consider yourself a sinful investor? “Sin” stocks are companies that do business in the tobacco, gambling, alcohol, weapons and entertainment business. Some people are ethically opposed to such stocks, arguing that owning them is the equivalent to supporting these businesses. Others don’t mind, or even partake in the industries themselves, and figure that if these companies are making money, then as an investor they should reap the rewards.

For those that are feeling a bit sinful, here are 7 “sin” stocks that deal with ways to profit from bad habits. Make sure to do your own research and learn more about a slice of the market that caters to our more decadent desires.

1. Anheuser-Busch Companies, Inc. (NYSE: BUD): This company has a strong brand name and a steadily-increasing dividend. It’s up about 5 per cent year-to-date and pays a dividend of about 2.5% per year. Over the past five years, it’s been flat. Their growth seems to be slowing down as competition increases. Bud may be the King of Beers, but it’s high debt and low growth would indicate that it’s a steady producer of unspectacular but solid earnings.
2. Vice Fund: Consider a mutual fund of a whole bunch of sin stocks (found at www.vicefund.com). It’s performed at 20% per year over the past 5 years. This fund invests in casinos, weapons, gaming equipment and slot machines.
3. Molson Coors Brewing Company (NYSE:TAP): If Anheuser-Busch looked a little flat and unexciting, check out Molson Coors, another beer producer who’s seen some success over the past few years. They are steadily increasing their equity and their stock is up 60% over the past 5 years. It’s also increased their dividend steadily over that time frame.
4. Altria Group, Inc. (NYSE:MO): Altria is one of the greatest companies of all time from an investor’s point of view—they have a healthy and increasing dividend, they have customers who are literally addicted to their product and they are geographically diversified. And they pump out cash, and lots of it. You might better recognize the company as “Philip Morris”, the gigantic cigarette manufacturer. They recently spun off Kraft Foods and are looking to similarly spin out Philip Morris International, with the belief that smaller, autonomous companies can run leaner and meaner and make more money for shareholders.
5. Great Canadian Gaming Corporation (TSX:GC): At a market cap of just over one billion dollars, this little company might not hit the radar screen of many large investors. However, they operate 11 casinos, mulitple horse racetracks and a hotel among other diversified businesses spread out over three Canadian provinces and Washington State. It’s up 21% in the past 12 months and over 300% in the last 5 years, although it’s struggling with profitability as it continues to acquire and grow.
6. Rothmans Inc. (TSX:ROC): This Canadian cigarette company enjoys many of the staples of a good investment—a steadily increasing dividend, a high (30%) profit margin and a repeat business model (since their customers are addicted). It’s dividend payment is almost 6 per cent per year, so income investors would want to research this one further.
7. Starbucks Corporation (NASDAQ:SBUX): Is coffee addictive? Some would argue that charging five dollars for a high-end beverage is definitely a sin, but that hasn’t kept customers out of the stores. Expansion has been going full-tilt for the past 5 years, but the stock has come off sharply from it’s head-spinning highs of 2006. It’s still trading at around 30 times earnings, but many investors have taken their profits and left the scene. With plans to expand internationally and market high-end teas and coffees in China and India, the huge growth that we’ve seen from this chain could continue for the next decade.

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