Now that you know how to analyze a stock, let’s talk about risk management.
There is a saying
Don't put all your eggs in one basket.
It turns out to be the most important investment principle. It means that you shouldn't invest all your money in just one asset. If this basket loses value, your whole capital will too.
The 8 essential questions to ask yourself for good diversification.
First step: DIVERSIFICATION ALL AROUND
1. Do you have a bias towards one instrument?
For example, you have a portfolio of stocks and nothing else. Add the missing elements: funds, bonds and precious metals.
Not good: an all-stock portfolio.
Good: stocks and ETFs (even a Gold ETF)
2. Do you have a bias towards the IT sector? Or financial?
Make sure you cover at least 5 different industries.
3. Do you have geographic diversity in terms of assets?
For example, the best part of our collections is that we offer a wide range of companies from different countries. Here you can find not only American but also Chinese, Brazilian, Indonesian, European companies, among others.
Second step: BALANCE THE RISKS
4. Do you have balance in positions?
The perfect scenario is if you have stocks with the same total values. Otherwise, there is a risk that your one expensive $3,500 stock in Amazon could pull down an entire portfolio of $100 in 10 other assets.
The Google stock drops 2%, the other two grow 10%. Looks good on paper, because 5 is more than 2, right?
But in reality, 2% of Google is $56.
10% of Microsoft and Intel is $18 and $5 respectively.
So you are at a loss of $33!
5. Do you have free cash so you’re able to buy on drawdowns and to average positions?
It’s considered good practice to keep 10-15% of funds in cash, but if you sense the RISK ON situation on the market (like now) you can increase the share of free cash up to 50%.
6. Do you have price targets for each stock? How much growth do you want to achieve as a result?
To avoid emotional swings, set targets for each stock. So that you don’t get nervous when you see +13% on some stock because you know that you expect +15%. Execute these targets and don’t regret that you sold them too early. It’s better to underearn than to lose.
7. What loss are you willing to suffer on an asset before you sell?
The same principle as in the previous point. Set limits to your losses. Because if the stock is falling, then it’s worth selling now and maybe buying it cheaper. Books say to put stop-loss at -2%, but some stocks can be so volatile that they swing +/- 2% a day. So build the individual stop-loss on each stock.
WHERE TO FIND SO MANY STOCKS TO DIVERSIFY YOUR PORTFOLIO CORRECTLY?
1. Look around and start noticing brands around you
2. Read news and highlight interesting companies
3. Check “Collections” in Gainy
The easiest way to create a balanced portfolio is to use Gainy.
Our algorithms created by professional portfolio managers take into account all these diversification principles to design your own, personalized set of stocks.
This should give you a sense of confidence in your financial future.
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