Like most investors, one of your top goals has been to enjoy financial freedom at whatever age you choose. So, it stands to reason that your money should ideally generate above-market returns with below market risk.
Truth is — if you really want to become a better investor then you need to be looking at where the smart money is heading. You need to understand what is truly driving the markets and how you can take advantage of these moves as – and before – they hit the mainstream.
That’s how the long-term wealth can be found.
However, as you start your journey, there are essential rules to abide by.
Diversify Your Portfolio
We all know the saying ‘don’t put all your eggs in one basket’, but it’s essential to apply this rule when investing. Spreading your money across multiple assets means you won’t be depending too heavily on one kind of investment. If one of them performs badly, hopefully some of your other investments might make up for these losses.
A diversified portfolio can include large and small companies, different industries or sectors, U.S. and overseas securities, Bonds as well as cash.
Only Invest in What you Understand
Before you put your money into any investment, do your own due diligence. Take the time to understand the investment. Dig into it before putting your hard-earned money on the line on a hunch. Look at earnings, technical setups, the management team, and its history.
Have a Stop-Loss in Place
Ideally, in order to protect your portfolio, you have to plan ahead. Setting a stop-loss means you can possibly protect yourself from a coin that completely tanks. Make your plan, and stick to it. Many investors use a -25% stop loss, or even a trailing stop loss to protect a stock after a big move higher. For example, if you bought a $10 stock, and it ran to $20, you can either sell it for the win, or you can set a trailing stop loss and allow the stock to move higher. Let’s say you set a trailing stop loss at $18. If the stock falls to $18, you’re stopped out. If it never hits $18, the trailing stop is never triggered. You can also reset your trailing stop loss as the stock price appreciates higher, too.
Don’t Follow the Herd
One of the key reasons that many investors under-perform in the market is because they move in and out of assets at the wrong time. Oftentimes, an investor sees everyone else making money from rising markets. This is when they tend to throw every spare dollar into their investments.
Unfortunately, when that same investor sees a group of other investors selling, that investor sells too. According to Warren Buffett, they are influenced by the herd mentality, which can be extremely damaging to a trading portfolio.
Stress test your portfolio
“When stocks are at record highs, most investors get a false sense of their true risk tolerance, or ability to emotionally and financially deal with losses,” says USA Today. “The best way for investors to find out how big a market drop they handle is to envision how they would feel if the market tanked, says Susan Kaplan, president of Kaplan Financial Services.”
To stress test your portfolio, have a discussion with your financial advisor.
There are two key questions to ask. First, can your portfolio weather a possible downturn if the market were to sink with your current allocation. And two, if the market were to plummet, can I still attain my financial goals.
Any financial professional should be able to provide guidance on both questions.
If not, maybe you need a new advisor.