Chart of Day: Five Key Ways to Protect your PortfolioNovember 26, 2018
Markets have been exceptionally volatile over the last few weeks, and recently that volatility has trended downward.
Since October 2018, the Dow Jones slipped from nearly 27,000 to 24,446. The S&P 500 fell from 2,925 to 2,649. The NASDAQ plummeted from 8,100 to 6,972. Even the Russell 2000 tumbled from 1740 to 1,469. Whatever the market has in store, it’s essential that you protect your portfolio.
Here are five of the top ways to do just that.
Tip No. 1 — Remember that Markets are Resilient
During times of volatility, it’s easy to panic and sell. However, unloading quality stocks just because the market is falling, can be a big mistake.
History has proven time and time again that markets are resilient. According to Fidelity, “during the past 35 years, the market has experienced an average drop of 14% from high to low during each calendar year, but still had a positive annual return in more than 80% of the calendar years in this period.”
Tip No. 2 — Diversify Your Portfolio
We all know the saying, “Don’t put all your eggs in one basket”, and it’s essential to apply that rule when investing. Spreading your money across multiple assets means you won’t be depending too heavily on one kind of investment. If one of them performs badly, hopefully some of your other investments will make up for those losses.
A diversified portfolio can include large and small companies, different industries or sectors, U.S. and overseas securities, and bonds as well as cash.
Tip No. 3 — Don’t Follow the Herd
One of the key reasons that many investors lose money is because they move in and out of assets at the wrong time. Oftentimes, an investor decides to throw every spare dollar into an investment because it’s hitting a new high – or the market is skyrocketing.
Unfortunately, when that same investor sees a group of other investors selling, that investor sells too. According to Warren Buffett, they are influenced by the herd mentality, which can be extremely damaging to a trading portfolio.
Tip No. 4 — Stress Test your Portfolio
“When stocks are at record highs, most investors get a false sense of their true risk tolerance, or ability to emotionally and financially deal with losses,” says USA Today. “The best way for investors to find out how big a market drop they handle is to envision how they would feel if the market tanked, says Susan Kaplan, president of Kaplan Financial Services.”
To stress test your portfolio, have a discussion with your financial advisor.
There are two key questions to ask. First, can your portfolio weather a possible downturn if the market were to sink with your current allocation. And two, if the market were to plummet, can I still attain my financial goals.
Tip No. 5 – Take Advantage of Market Pullbacks
As Warren Buffet advises, “Widespread fear is your friend as an investor, because it serves up bargain purchases.”
That fear often breeds opportunity. Savvy investors know that when everyone else panics and sells, that’s the time to pick up some incredible quality stocks that have been beaten down to unrealistically low prices. You won’t find many investors that enjoy market pullbacks. But they happen. The best you can do is prepare for those pullbacks by keeping a little cash on hand to purchase quality stocks when the market knocks them down to bargain basement prices.