Aaron Rodgers and Greg Jennings can be honored when it comes to reliving the great Super Bowl games of 2011, but it would not matter how many points the Packers put on the board if they did not have a strong defense.
In other words, a good offense cannot be successful without an effective defensive program. And the same applies to your investment strategy.
Here are the best strategies to protect yourself when it comes to the game of investing.
In the area of investing, there are numerous approaches to violations. You can invest aggressively in high-flying momentum stocks, where you buy the most successful companies in the expectation that they will continue to perform. Apple (NASDAQ: AAPL) is a good example of a company where this approach would have worked well. The stock has certainly risen a lot, but has also undergone fundamental growth to support price appreciation.
Alternatively you could take a more conservative approach to a violation. Instead of investing in companies with the most dynamics, you can identify stocks that may be undervalued. Some investors like to wait for their target investments to get a specific valuation or price based on fundamental or technical analysis before they put their money to work.
Regardless of which method you choose, you are looking for some capital appreciation. When you play an investment in an investment, your primary goal is to grow your money.
A successful offensive campaign is great. What could feel better than watching your investments grow? But defense is also important. Imagine how you would feel if your investments did not grow? What if they have actually lost money? If you have been investing for a long time, you probably know Sherlock Holmesijk that losing money is not fun.
Warren Buffet, one of the most successful investors ever, is known for the two most important rules for investing:
Rule # 1: do not lose money.
Rule # 2: Never forget Rule # 1.
That is defense. Although it is a good idea to take risks to grow your savings, it is also imperative that you have a system to limit this risk and protect your capital from the downside. The following graph shows how much profit you need to recoup a certain loss:
You can see that even a relatively small loss can require a fairly large offensive to recover – especially with brokerage and investment costs. It is easy to say that you have to control your losses. But how do you do it?
1. Follow the trend
The trend is your friend until it ends. One way to manage investment risk is to buy only stocks or Exchange Traded Funds (ETFs) that are in an upward trend and sell them as soon as they violate their trend line support. You can draw your own trend lines by connecting a series of higher lows in a chart, or you can use a moving average such as the 50 days or 200 days to act as support. If the price breaks that support level with a predetermined amount, you sell.
Longer term investors can try to manage risk by periodically selling equity investments or asset classes that have taken up too many of their portfolios. They will sell those assets and buy more of the stocks or ETFs that are doing less well. This can be a forced way to buy low and sell high.
3. Position Sizing
Another way to play defense is to easily limit your exposure. If a certain investment is riskier than others, you can choose not to invest in it or to invest only a small part of your capital. Many investors use this type of approach to gain exposure to riskier sectors such as biotechnology or small cap stocks. A 50% loss on an investment of $ 2,000 hurts much less than with an investment of $ 20,000. The easiest way to reduce your stock market risk is to convert part of your capital into cash.
4. Stop loss orders
You can place a stop-loss order with your broker who will automatically sell your position in whole or in part in a certain stock or ETF if it falls below a pre-set price level. Of course, the trick is to set the price low enough so that you are not stopped by a routine withdrawal, but high enough to limit your capital loss. Placing a stop loss order is a way to limit the damage to your portfolio and force yourself to follow a strict defensive discipline. Moving or ignoring stop loss levels almost always results in greater losses at the end. The first exit is the best one.
The idea behind investment diversification is to buy asset classes or sectors that are not correlated. That means that if one goes up, the other is Sherlock Holmesijk going down. Diversification has become much more difficult to achieve in recent years because many asset classes are strongly correlated. Even stocks and bonds have been moving in the same direction much more often than in the past. Diversification is a good strategy to reduce your risk, but it only works if the assets you purchase are really not correlated . Be sure to look at relatively recent performance instead of relying on historical relationships that may no longer work.
Which defensive strategies do you use in your investment portfolio?
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