How can you protect your portfolio and  avoid risk in investing

How can you protect your portfolio and avoid risk in investing

how to protect your portfolio

The modern approach to investing has shifted from buy and hold. To buy and protect many investors feel more confident in buying a stock than in selling one. However, protecting your portfolio will likely require that you occasionally sell a stock for a small loss in order to avoid a larger loss. In this post, we’ll look at some basic strategies you can use to protect your portfolio.

researching your investments

Your first step should consist of researching your investments before you buy as consumers. We live by the motto caveat emptor let the buyer beware. The idea is that we need to know what we’re buying before making a purchase.

The same principle holds true in the stock market just because a company is listed on a national stock exchange does not mean it’s a sound investment. Of course, companies must meet certain requirements in order to sell their shares to the public. However, you still need to take the time to make sure the company you’re considering meets your investment objectives. A good understanding of the company fundamentals can be helpful consider reviewing one or more of the following earnings and dividends how much profit the company makes for a period and how much gets paid out to shareholders market capitalization the total dollar value of all company shares calculated by multiplying the shares outstanding by the current market price institutional ownership what percentage of the shares are owned by mutual funds and other institutions.

know the long term trend

trend_up_down_traderman

 The next step in the process is to know the long term trend. You should look at the trend before you make your investment. And then you should monitor it afterward don’t get caught up in the day-to-day volatility. Look at a 5 or 10-year weekly chart for example. If the price generally moves from lower left to upper right. Then the trend for that time period is moving higher. Stock prices move higher when buyers are in control. And money’s moving into the stock as with any other investment continued demand helps to drive prices higher. On the other hand, a price chart that moves from upper left to lower right indicates a downtrend. This tells us that sellers are in control or that demand is waning in the prices falling.

risk versus the reward

Next, consider your risk versus the reward for your investment once again this step should be done before you make the initial investment and then evaluate it on a regular basis. Every investment involves various types and levels of risk. You need to be sure that the risk you’re taking is justified by the profit.

You can reasonably effect this is another area where the stock price charts can help you the charts will show you price levels known as support and resistance these are the historical price levels where the stock rises and falls while not a guarantee of what the stock will do it can serve as a guide for your decisions. For example, you may see that a stock has risen to thirty dollars several times over the last year and then fall into twenty dollars. If it’s hovering around thirty dollars you may decide to wait until either it falls or rallies above thirty dollars. Before you buy that would be better than buying it at thirty dollars and then losing thirty percent if it should happen to drop the twenty dollars.

Once again protecting your portfolio does not require that you watch the market day in and day out a stop order is a tool that can help you limit losses and capture gains automatically a stop order is a special type of water that only activates if your predetermined price is reached.

consider your entire portfolio

finally consider your entire portfolio and not just select positions protecting your portfolio may mean you include some types of investments that stay flat or even drop a little when most of your stocks are going higher however that same investment may go higher when the rest of your stocks are underperforming that’s the idea behind a diversified portfolio.