When markets begin to fluctuate, it might be tempting to make alterations to your investment portfolio. However, history shows that those who stay invested all through market and economic cycles are more liable to earn positive returns in the long run. Financial Expert Joseph Stone Capital believes that risk is everywhere and some people take steps to protect themselves and manage that risk while others leave it up to luck.
The same holds when it comes to building wealth for the future. Some investors focus firmly on returns and how fast they can grow their money. Others protect themselves against the unavoidability of a correction by using different risk management strategies.
• Asset Allocation
Asset allocation refers to the way you measure the investments in your portfolio to meet your financial goals. It is the act of investing in diverse asset classes — such as bonds, stocks, alternative investments, and cash — that should also take your tax situation, risk tolerance, and time horizon into account.
If your goal is to pursue growth, and you are willing to take on market risk to reach that goal, you can decide to place as much as 80% of your assets in stocks and as little as 20% in bonds. Before you decide how to divide the asset classes in your portfolio, make sure you know your investment timeframe and the possible risks and rewards of each asset class. Different asset classes offer varying levels of potential return and market risk.
• Devising Your Plan
It may be more difficult than you would expect. You will need to set the maximum gain you will accept and the maximum loss you will tolerate for your investments, but these maximums and minimums should not essentially be the same for every stock. In other words, you must examine each stock individually to estimate how much it is likely to move in either direction.
Some investors use technical or fundamental analysis or a mix of both to determine appropriate limits for gains and losses. Joseph Stone Capital says that another way to devise your limits is by modeling your plan on the performance of a designated benchmark. Another factor you must consider when devising your plan is your risk tolerance, which depends on many factors, such as your personality, your time frame, and your available capital.
• Stay Disciplined
After you have your profit/loss strategy in place, you will have to keep in mind that the whole idea of the plan is to establish strict guidelines for when to sell. Sure, it hurts to see a stock continue to rise once you have sold it, but it is often better to sell on the way up than to wait until you have to dump the stock while the cost is collapsing after its peak.
Whatever strategy an investor chooses, risk management is vital to keeping hard-earned savings and losses to a minimum. Also remember that devising your plan requires detailed research, analysis, self-assessment, and a realistic outlook.