Please note that the information in this article should not be construed as investment advice.
Investing always comes with risks. But although they’re hard to avoid, there are steps you can take to cut your losses in the worst cases.
‘Diversify your assets.’
You’ve probably heard this too many times. It’s often the first lesson beginners are told when it comes to risk management. Never put all your eggs in one basket.
It may sound too simple, but the principle behind it makes it sensible. Don’t put all your money under the same kind of risk. In terms of investments, this means you should buy different commodities. For example, precious metals like gold, silver, and palladium.
1. Diversify Your Investments
Under the modern portfolio theory (MPT), one key investment strategy is diversification. This theory holds that when markets drop, portfolios with diverse assets would survive better than those with fewer asset types. This is also what finance analysts usually call a market downturn.
The idea behind diversifying your portfolio is that the impact of one asset’s risk wouldn’t always affect other assets. This risk management and investment protection strategy normally works with unsystematic risk. It affects only one particular company or industry. It’s different from a systematic risk, such as an economic crisis, which can affect the market as a whole.
2. Invest In Non-Correlating Assets
The next strategy you could adopt is investing in non-correlating assets. Diversification is about investing in different assets under the same category. However, investing in non-correlating assets means putting your money into different asset categories. As a result, the market value of your asset classes won’t have a direct correlation with each other.
A good example is mixing up your investments. From equities and stocks, combine stocks and precious metals. Other categories you can consider are real estate, bonds, and foreign exchange currencies. The more modern ones are exchange-traded funds, cryptocurrencies, and non-fungible tokens.
Non-correlating assets help to reduce volatility by creating a balance through variety. That’s because when one price goes down, the other assets wouldn’t necessarily go down with it. Consequently, they help to cushion the effects of systematic risks, which are difficult to avoid.
3. Buy Put Options
There are now plenty of digital trading apps available. This means even average working-class people can access potential wealth accumulation platforms. But even before the advent of these apps, stock market traders already had ways to protect their positions and investments. One such way is buying a ‘put option’.
A put option won’t necessarily make you money. However, it’s a contract that’ll help you from turning what-could-be profits into losses. It gives you an ‘option’ to sell your stocks for a price at some point in the future. For example, you buy stocks from a company you’re confident about. However, when the prices spike up fast, you might expect it to decline soon. Under the contract, you’ll have the option to sell your stocks at a strike price before it expires.
4. Use Stop-Losses
A stop-loss order may help protect your investments from price falls. There are different types of stop-loss orders. But essentially, it’s a preparation to sell your assets when they reach a certain price point. For example, you can put a 15% stop-loss order. When the asset price falls 15% below your purchase price, it will be sold automatically.
By setting this advance order, your losses also stop at the maximum limit you set. This is helpful when sharp and quick changes happen in the market. However, you’ll need a plan in place for this strategy. Stop-losses don’t offer complete protection. Moreover, in some cases, it may only be temporary. Although it’s a useful exit plan, strategic placement is more ideal.
5. Invest On Dividends
Here’s another way of protecting your investment. Choose high-performing companies that reward dividends after a certain period. It’s perhaps one of the least-known ways of protecting your investment portfolio. This is because part of a stock’s total return on investment comes from the company’s dividends.
Also, consider investing in blue-chip companies with consistently high performance in operations and revenues. In every market, there would always be companies reporting consistently high or profitable revenues each year. These are stable companies with professional management that also operate as a public trade.
They’re usually well-known in a specific market to have been in operation for several decades. Some of them have been running for more than a century, which attests to their stability and longevity. Furthermore, their solid financial performance continues to outlive and outlast all the risks and economic downturns through the years. These types of companies sometimes declare dividends several times a year.
Aside from the long-term upward trend of their share prices, these companies may also declare higher dividends each year. There are, of course, times when these businesses also get a taste of the market downturns. But the idea behind dividends as investment protection is that market prices would eventually go back up. If you could stick around long enough until they release their dividends, perhaps your investments would go up. And of course, you’ll get the dividends as well.
6. Learn And Plan
The best way to protect your investment is to keep learning. But to make the most of what you learn, use them to further develop your investment plans. This includes learning from your mistakes. The stock market isn’t just risky, but it also keeps changing. Adjust your strategies if you have to, especially after significant market changes. Learn the pros and cons of each strategy and try to find a balance from there. That’s how you can invest wisely.
When analyzing something, whether it’s a company or a new strategy, always look from all angles. Also, don’t forget the industry dynamics. At the end of the day, the most important investment you should protect and develop is yourself. So never stop learning.
More Baskets Of Eggs
Putting all your eggs in one basket may be an age-old principle. But, it’s as valid in this digital new-normal era as it was back then. Investments are always full of risks. But to reduce potential losses, you can always invest in a wide variety of assets. Additionally, always adapt your investment plans to the constant changes in the market.