If you have little experience with investing in stocks, bonds, or even real estate, it can be nerve-racking. You might feel like the slightest change in the stock market could have a negative impact on your investments and portfolio. The good news is there are ways to help minimize risk and pursue portfolio protection strategies. Here are some common protection strategies to keep in mind.
Check Your Risk Tolerance
Understand how much risk you are willing to handle and what type of investments you are willing to take on. If you haven't invested before, it may be difficult for you to understand the risks involved in investing. Before you decide on an investment, determine what your risk tolerance is and if you can take the risk that's involved in investing. Tools like Riskalyze can help you analyze your risk tolerances. A few minutes and the answers to a few questions about your financial strategies can be used to provide you with a personalized risk tolerance number.
Diversify Your Portfolio
Diversify across all your accounts. Even if you have different types of accounts, there could be some overlapping allocations that might mean you aren't as diversified as you originally thought.
Determine Your Investment Horizon
If you have a long-term investment horizon, you may be less affected by short-term volatility and may be able to avoid panic trading. The more time you have to stick with your investment goals, the longer you have to potentially recover from stock market ups and downs. Have a set timeline in mind and give yourself as much time as possible to pursue your investment goals to help avoid severe impact and reactions from stock market volatility that may come along.
Stop loss orders help protect against falling share prices. They're used to limit losses on stocks that drop too far. Hard stops involve triggering the sale at a fixed price that won't change. For example, when you buy shares of Company A for $10 per share, you could set a hard stop of $8. This means that if the price falls to $8, the trade will be closed out as a market order. A trailing stop is different in how it works. Instead of being triggered at a specific price, it triggers when the price reaches a certain percentage above or below a pre-set level.
One strategy involves investing in dividend-paying stocks. When you buy shares in a company, you're buying into the future success of that company. And one of the most important parts of owning a stock is receiving regular cash payments called dividends. Historically, dividends account for a substantial part of a stock's total annual return.
A well-diversified portfolio spreads your investments across different types of securities, industries, geographies, and even sectors within those categories, and allows you to work to reduce the systematic risk that is always present when investing. When you add non-correlated assets to your portfolio, you're increasing the odds that your investment won't take as big of a potential hit during market downturns. This is because each asset class moves in an independent manner. For example, oil prices might drop, while gold prices rise. In both cases, the effect is minimal. However, when oil prices go up and gold prices fall, the effects cancel each other out. Oil prices are low, and gold prices are high. As a result, the value of your entire portfolio doesn't change much. In contrast, when oil prices plummet and gold prices soar, the effect is significant. Your portfolio loses some value, but not nearly as much as it could lose if you invested entirely in either sector.
Investors who are worried about maintaining principal might want to consider principal-protected notes with equity participation rights. They are similar to bonds in terms of how they work. However, where they differ is the equity participation that exists alongside the guarantee of principal. This could make a big difference, especially since it allows you to participate in the upside potential of the underlying security. If the index rises over the life of the notes, the investor gets paid out the difference. If the index falls, however, you could lose your entire original investment.
As you're learning more about the world of investing and what you can do to help protect yourself, contact the office.
This material was developed and prepared by a third party for use by your Registered Representative. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. The content is developed from sources believed to be providing accurate information.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
A diversified portfolio does not assure a profit or protect against loss in a declining market.