Investments are risky business. You could end up losing all your investments in a single bad day, or, alternatively, you could end up creating sustainable wealth with the right amount of care and patience. Protecting your investment(s) is something of a necessity in today’s markets, and we’re going to show you how.
These five protections are simple, straightforward, and will help protect the overall security of your portfolio.
1. Keep Cash on Hand
You’ll want to keep cash on hand for your short-term spending needs. The markets can fluctuate in ways that nobody can accurately predict, and you don’t want all of your short-term money tied up in the markets. It’s better to have a chunk of change stored off to the side somewhere in a bank account. The markets are a bad place to store your short-term spending money!
That being said, you don’t have to store millions in a separate account, but you want to make sure you’ve got enough set aside to meet your financial needs should the market(s) tank and you lose money. Think of this as sort of your investment “emergency fund”. This financial freedom guide can show you how to better manage your money in situations like this.
When it comes to investing, sticking all of your eggs in one basket is perhaps the fastest way to lose it all on a bad day. The experts agree that diversifying your portfolio is one of the best ways to protect your investment assets, and doing so is easier than you might think.
There are dozens of investment options available today, from stocks and bonds to ETFs, mutual funds, and more. You can even try something a bit more risky like investing in a foreign market. Each investment has a different rate of return, so you could potentially make more or less on each individual investment depending on the situation.
Don’t be afraid to take a risk on something you haven’t invested in before. Be sure to do your research, but most of all, don’t put everything you’ve invested in one product.
3. Stop Losses
Stop-loss orders can help protect your investments should prices fall. When you buy a stock for X amount of money, there’s always the chance that it will fall in the coming weeks/months/years. Essentially, a stop-loss order will sell off the stock automatically if the price falls below a certain amount.
Let’s say you’ve bought some stocks for around $20/each. Within a few months, your stocks’ price falls to below $15. Your stop-loss order is set to automatically sell the stock when it falls to $15, so you can avoid major losses. This is called a hard stop, because there’s a fixed price in place for when to sell the stock.
Another option is a trailing stop. This type actually moves with the price of the stock, and instead of a hard amount, it’s set at a percentage. For more information on trailing stops, visit this link.
One of the most common ways to protect your portfolio is by investing in dividend-paying stocks. Companies that pay dividends on their stocks seem to have increased earnings and generally perform better on the markets, and, in addition, you’re getting an above-average return on your stocks with that company.
Dividends help increase the overall amount you’re getting back on returns. They also protect against inflation and other negative occurrences in the market. The more money you’re getting back from an investment, the better. Your dividends will help provide a sort of “safety net” for your portfolio.
5. Stay Informed, But Don’t Be Swayed
This seems to be a topic of debate among financial experts; should you track financial news or ignore it? We’re going to put our flag somewhere in the middle. You absolutely should be at least somewhat informed about what’s happening in the markets. Otherwise, you could end up making a poor decision due to a lack of awareness.
However, getting too invested in financial news can likewise cause you to make poor decisions. It’s best to stay informed, but stick to your investment plan and your instinct when it comes to making any big decisions about your portfolio.
Too many investors (especially inexperienced ones) get caught up in what’s on the news and make rash decisions. Try to maintain a balance between awareness of the markets and sticking to your own plans and investment advice from your financial planner.
Protecting your investments is crucial in today’s markets and doing so isn’t overly complex. Following these five tips will help you put the right protections in place and help minimize your losses. Remember, don’t make any sudden decisions based on what you see on TV. Happy investing!