In order to learn more about investing, you’ll need to speak with hundreds of smart people year after year, from market strategists and analysts to fund managers and financial planners. In doing so, you’ll find out that there is a myriad of investing strategies, but only some basic ones that deal with managing risk. Let’s take a look at seven awesome tips to managing risk in today’s market.
Invest In What You Understand
Investing in what you know and understand allows you to avoid getting caught in stock-market bubbles and to remain somewhat calm during extreme volatility because you can better pinpoint a company’s true worth. Because you are knowledgeable, your mind is set at ease.
Less Debt Means Less Risk
When choosing individual stocks, you’ll want to look closely at the company’s balance sheet. Too much debt hinders growth and a company’s ability to withstand economic storms. Take time to understand the company’s balance sheet and how that will impact your money in the future.
Use Dividends to Diversify Your Stock Holdings
Instead of selling stocks to keep your portfolio in balance, take dividends in cash and use the proceeds to invest in sectors in which you have little or no exposure. This improves diversification without running the risk that you will receive a tax bill when it’s time to sell.
If You Use Funds, Look Under the Hood
Owning a variety of mutual funds doesn’t necessarily make you diversified when your funds own a lot of the same stocks. That’s a tough lesson many learned during the 2000–2002 bear market, during which many funds were caught holding overvalued blue-chip stocks and highly priced dot-coms. It’s better to examine your funds’ holdings before the market crashes to make sure your portfolio is as diversified as you think it is. You may want to consider speaking with a financial advisor to help you with this.
The Right Stock Can Replace a Bond
With interest rates as low as can be, many readers have turned to high-yielding stocks to replace all or a portion of their bond holdings. Having said that, it’s important to keep a close tab on a company’s earnings as well as its cash flow to make sure it can afford to keep paying and raising those dividends.
Cash Isn’t Trash
Even if it pays nothing, cash is always useful and will help you tremendously. Erik Gordon, CEO of ErGo Ventures LLC, a private equity and venture capital investment company, asserts that it’s important to keep some on hand to take advantage of market downturns. In the midst of this stock-market correction in 2018, it’s more important than ever to have some cash ready to go.
Patience is a Virtue
Not every stock takes off like a rocket, even in a bull market (believe it or not). Whether due to industry or company-specific issues, even stocks of great outfits can stagnate. Because they play for the long-term, most experienced investors have learned that today’s loser often turns into tomorrow’s winner.