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Smart Stocks for New Investors

As the Fool's resident fund geek, I'm a big fan of portfolios that are built on a solid foundation of well-diversified mutual funds. Once that's in place, you'll be in a good position to cherry-pick the individual stocks that match up with your timeline and tolerance for risk -- not to mention your desire to have a fun time investing.

Researching and following stocks should be enjoyable and profitable, after all. With that in mind, here are three rules of thumb (and a clutch of promising stocks) to consider as you go about the business of investing Foolishly.

1. To thine own self be true.
I know Polonius is supposed to be a Shakespearean windbag, but this little tidbit from Hamlet is sound advice. If, for example, you have a stomach for volatility, you may want to tilt your portfolio in the direction of Mr. Market's racier fare.

On that front, Yahoo! (Nasdaq: YHOO  ) and Stryker (NYSE: SYK  ) should make your investment short list. Each sports a price-to-earnings (P/E) ratio that surpasses the broader market's by a healthy margin. But that's just the price (multiple) you pay for outsized earnings-growth prospects: Both are expected to put up growth numbers of at least 20% over the next five years -- and each has cranked out gobs of free cash flow (FCF) over the course of numerous years, too.

Those are good signs, but make no mistake: Promising prospects though they are, heaping helpings of expectations are baked into their prices. And that point leads to tip No. 2...

2. Don't go whole hog.
Even if you are the daredevil type -- and especially if you prefer to ride roller coasters at amusement parks -- you should strive to build a balanced portfolio. Doing so will help smooth the speed bumps on your path to Millionaire Acres.

In that vein, value-priced stocks should be a part of your investment game plan, too, and Bank of America (NYSE: BAC  ) and Johnson & Johnson (NYSE: JNJ  ) are intriguing prospects just now: Both trade with P/Es below that of their typical industry rival and the broader market as well. ConocoPhillips (NYSE: COP  ) , Chevron (NYSE: CVX  ) , and IBM (NYSE: IBM  ) all sport similarly discounted multiples, too.

As I've suggested in the past, that kind of valuation profile certainly doesn't add up to an automatic buy. Still, investing newbies should give these companies careful consideration. As investing, um, oldies can tell you, despite trading on the cheap, all have bested the market for the 10 years that ended with March.

3. Put it all together.
Finally, as you build your portfolio, be sure to do so with your complete financial picture in mind. You can increase your wealth through the stock market, but if you're piling up debt (particularly on high-interest credit cards) or keeping short-term cash in low-yielding savings accounts, you could be surrendering your gains without even knowing it.

Enter Motley Fool Green Light. From where to stash your emergency savings to investment vehicles for daredevils and conservative types, our service can help get you ahead of the financial curve with advice you can put to use right away. You can test-drive the newsletter for free -- just click here and a 30-day guest pass is yours for the taking.

This article was originally published on Dec. 28, 2006. It has been updated.

Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service and co-advises Motley Fool Green Light with his pal, Dayana Yochim. Yahoo! is a Motley Fool Stock Advisor recommendation. Bank of America and Johnson & Johnson are Income Investor picks. You can check out the Fool's strict disclosure policy by clicking right here.

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