Stocks are considered to be one of the more stable financial assets out there. After all, everyone buys them – small-time investors, hedge funds, pension funds, and trusts, etc. Yet despite the relatively more predictable and stable nature of stocks, major economic events can still send prices flying in all directions. Here are four tips on how to avoid major losses on your stock portfolio:
Know What Moves Your Portfolio
Stocks move for a variety of reasons, from worsening geopolitical relations between countries to management-level problems that are affecting business growth and revenue. Look at each company that you hold shares in and determine what fundamental catalysts move them. This will help you better understand why your portfolio is going up or down at any given moment.
Predetermine Your Entry and Exit Points
Before you buy a stock, determine what price points the stock has to reach before you consider closing it. Identify a price point for a losing position and another price point for a winning position. This is commonly referred to in the realm of trading as a stop loss and target profit. Set a hard stop loss on every position you take to limit potential losses in the event of inexplicable and erratic market behavior.
Remove Emotions Out of the Equation
There is no room for emotions in investing. Being hopeful is a common crutch of novice investors. They tend to hold onto losing positions far longer than they should until the position becomes too large to bear. Said investors become hopeful that the losing position may rebound, and they can, at the very least, recoup some of the losses.
Of all the strategies and guidelines you’ll read about and decide to follow, risk management should be at the top of your list. Successful investors are not only great at looking for opportunities that most people can’t see, but they also manage risk consistently and thoroughly. Protect your capital by adjusting your position size, setting stop losses and profit targets, monitoring economic reports and financial statements, etc.
Apart from these four tips on how to avoid major stock losses, you should also avoid leveraged trades or money that you borrow from your broker in order to increase your tradeable position size. Only invest money that you can stand to lose.