According to Warren Buffett there are only two rules when it comes to investing; “Rule 1: never lose money, rule 2: never forget rulae 1”. Wise words indeed and perhaps more relevant now than when they was first said. There are now more ways than ever to invest in stocks and shares and it with this in mind that we take a look at some risk management strategies for your investment portfolio.
You will be familiar with the phrase “don’t put all your eggs in one basket” and it is exactly that which the term diversification relates to. Investing in a range of different areas is widely acknowledged to be good practice because you have “positions” that will perform differently to a particular event – it spreads potential risk and maximises potential profits.
Some investors believe that following trends is an effective way of managing risk. They will only buy shares that are in the ascendance and then sell before they reach their predicted resistance level – that is to say the highest price they are likely to reach.
Position sizing refers to a method of limiting your exposure to risk that involves thinking about how much capital you place on high risk investments. Position sizing works hand in hand with diversification – put a little capital into riskier investments whilst allocating larger sums into low risk shares.
Use Stop Loss Orders
Stop loss orders allow you to set a limit on how low a stock price can go before you sell your shares. They are a handy tool for investors who don’t sit around all day keeping a close eye on the markets, they are generally used on investments that are volatile and therefore can rise or fall dramatically in a short period of time.
Sometimes it’s not what you know but who you know and using an investment consultancy service like Hymans Robertson means that you get independent advice without any conflict of interest. Even technical traders who read charts in order to figure out what to invest in use other sources of information to help them turn a profit and so consulting experts can really pay dividends.
No matter which way you look at it, managing a profitable investment portfolio is all about managing risk, whether it be large or small. And so learning the techniques that enable you to do so with confidence can mean the difference between a high return and losing your shirt.
Tarik Pierce is the founder of InvestorTrip.com and regularly contributes articles to this website.
While living overseas, he uses PureVPN for a low cost VPN service.
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While his background is mostly related to trading stocks, he recently gained interest in real estate crowdfunding with Fundrise.