5 Best Ways to Avoid Loss in the Stock Market
- Overexposing / Having Inadequate Diversification
One of the most important ways to avoid loss in the stock market begins with diversification. It is best to invest money into multiple different funds instead of inventing one-hundred percent of your money into one stock. What happens when the stock plummets and you have all of your life savings invested? That’s right, the introduction to a negative portfolio right off the bat.
One way to gain diversification and exposure is to invest in multiple different funds within different industries. Therefore, if one industry is having poor quarterly performance, you will have others to keep your portfolio afloat.
“I’m not a believer in putting everything in one asset class, even if it’s a broad asset class,”– Allan Roth, founder of the Wealth Logic financial advisory firm
He suggests instead that investors spread their money among a U.S. mutual fund, an international index fund, and a high-quality bond fund.
Know the type of stock that you are investing in and look at the possibility of growth. What are large-cap stocks and what are small-cap stocks? Large-cap stocks are those with market capitalizations of US $10 billion and greater. Whereas small-cap stocks range between $300 million to $2 billion. On average, large-cap corporations tend to grow more slowly than small-cap companies.
2. Don’t look for unrealistic returns
One of the main things new-investors look for in the stock market is large returns. When traders look for high returns, they often times put all of their money into one high volatile stock. This can end up really good or really bad. But the issue with this investment strategy is they look for quick gains from the stock market. A well-experienced trader would aim for about 20-30% returns within a year whereas unknowingly a new-trader is hoping for around 80% return.
“Really high returns don’t predict future high returns, if anything they predict lower returns,” said William Bernstein author of “The Investor’s Manifesto”.
It is impossible to count on a stock with high returns quarter by quarter consistently to have high returns in the future, simply due to how the stock market works.
3. Be aware of Dividend Stocks
Do dividend stocks pose a risk? Are they the safest option? How can you tell if they are safe? What is a high and low dividend yield?
First, dividends are a percentage of a business’s profits that it is paying to its owners (shareholders) in the form of cash also quoted as its payout ratio. Dividend stocks are known to be the safest, most reliable type of investment. Most of these dividend stocks are top value corporations. When you take a look at the S&P 100 which offers a list of the largest and most hooked up organizations inside the U.S. you will also find an abundance of safe and developing dividend payers.
A high dividend yield results in more income but a larger risk, some analysts say that a 2-3% dividend yield is a high percentage while others say it to be low. There is no standard that classifies a high and low dividend yield. In addition, a lower dividend yield results in less return on investment but far less volatile. Knowing about the security that lies within dividend stocks, just because there is a high dividend yield does not mean it is a safe bet. Management within corporations every so often will use dividends to pacify angry investors when stocks are stale. Therefore, to avoid dividend traps, it is always important to evaluate the corporate strategy to find out how management plans to use their dividends.
The risk that lies within the high dividend yield is the thought that high yield will result in a higher return. This is a common misconception that many new-traders realize when trading dividend stocks. The reason for this is many high dividend yield corporations are not top performers on total annualized total return. When dividend trading it is important to do research on the ten-year annualized total return and the three-year annualized total return. This will help take all precautionary steps before making a dividend trade.
4) Hold cash reserves
It is very important for new-traders to focus on the amount of cash they have on standby. In order to be an efficient investor, one must always be ready to make the next investment. Without the proper funds and reservations–it would be impossible to make above-average returns.
5) Have a detailed plan
As an investor, there are many investment strategies and alternatives that can be taken to manage your money. Have a good game plan with an effective enter/exit strategy. A detailed plan should evaluate all of the following:
- Know your goals
- Ask yourself what approach needs to be taken?
- speculate the risk/reward factor along with all of the potential risks that follow
- use technical analysis to evaluate the stock
- Use fundamental analysis
- Have a designated risk capital
- reserve a certain amount of cash that is okay to lose in a worst-case scenario
- Know the industry
- the more you know about the industry and the factors that affect the industry, the more loss will be avoided
- Keep up with the news
- know when major events happen that may possibly affect your stock
- Know insider business information
- many financial websites such as smoogley.com aid in keeping people updated on insider business information
- Use limits
- limits will help minimize losses
“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”–Benjamin Graham