Breaking up investments is a great way to balance risk, making it a key component of a successful investment strategy. If you’re looking for ways to preserve the value of your portfolio and minimize losses during market downturns, follow these tips.
If you’re investing for long-term success, one of the worst things you can do is panic and sell off your stocks during a market downturn. The stock market is volatile, so it’s natural to see market corrections after months or even years of rapid growth. If you panic and sell your stocks at the first sign of trouble, you may lose some of your initial investment. Additionally, you’ll lose out on the opportunity to generate a return once the downturn ends and stock prices begin to rise again.
Assess Investments Regularly
The Financial Industry Regulatory Authority (FINRA) recommends monitoring your investments to ensure they’re helping you progress toward your goals. If you have a well-balanced portfolio, its total value should increase over time, even if some of your investments decline. When you assess your portfolio, you have an opportunity to sell underperforming investments and make sure your current asset allocation matches your original investing goals.
Stick with Your Strategy
It’s okay to rebalance your portfolio every few months. Still, you should always do so with your original investing strategy in mind, whether you’re into dollar-cost averaging or income investing. If you’re always adopting a new strategy, you won’t have enough time to truly reach your goals. You may even lose money if you try to time the market and miss out on the opportunity to sell a stock before it loses a significant percentage of its value.
Analyze Multiple Metrics
Some investors focus too much on a single financial ratio, causing them to make critical investing mistakes. These are some ratios you should learn and apply when assessing a stock to determine if it’s a good fit for your portfolio.
The quick ratio helps you assess a company’s ability to pay its current liabilities by converting some of its assets to cash. You calculate this ratio by subtracting prepaid expenses and inventory from the company’s current assets; then, you divide the result by the firm’s current liabilities. A quick ratio of 1 or above indicates that a company has enough liquid assets to cover its short-term liabilities.
Working Capital Ratio
Another way to evaluate a company’s ability to pay current liabilities with current assets is by calculating its working capital ratio. This ratio is similar to the quick ratio, except it includes prepaid expenses and inventory, making it a little easier to calculate. To determine a company’s working capital ratio, simply divide its current assets by its current liabilities. If the firm’s working capital ratio is at least 2, there’s a good chance it has enough liquidity to cover its short-term liabilities.
Price-earnings ratio, commonly abbreviated P/E ratio, helps determine the growth potential of a stock. It tells you how much you would have to pay to receive $1 in earnings from your investment. You calculate the P/E ratio by dividing the share price by the current earnings per share (EPS). Assuming a potential investment sells for $52.47 per share and has an EPS of $5, its P/E ratio would be $10.49. That means you’d have to spend $10.49 to receive $1 in earnings.
Take a Long-Term Approach
There’s something thrilling about buying and selling a stock a month later for two or three times what you paid. If you want to succeed as an investor, however, it’s important not to get too attached to these short-term wins.
Short-term investments tend to be much riskier than long-term ones, making it more likely you’ll lose money, especially if you don’t choose your investments carefully. Instead of looking for quick wins, take a long-term approach to investing.
Choose Quality Stocks
If you’re new to investing, you may be tempted to purchase penny stocks to build a portfolio quickly. These stocks typically trade for less than $5 per share, making them more affordable than stocks from well-established companies. When you have a limited amount of money to invest, choosing penny stocks makes it possible to buy hundreds of shares at a low price. Unfortunately, penny stocks are risky.
They’re typically issued by firms with no track record of success, making it more difficult to make wise investing decisions. Instead of buying penny stocks, look for high-quality stocks from established firms.
Aim for High Returns
Although investing impacts your tax situation, it’s important not to make buy/sell decisions based on how they’ll affect your tax liability. Instead, your main goal should be to aim for high returns. You can do this by carefully analyzing potential stock purchases and diversifying your portfolio to include several types of investments.
Take Calculated Risks
Risk is a normal part of investing. While that doesn’t mean you should make reckless decisions, it’s important not to play it so safe that you barely generate any returns. On the other hand, don’t be afraid to take a chance on a small company if it’s performing well and has a significant amount of growth potential.
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