How to Better Protect your Stock Portfolio in this Volatile Market
‘Never lose money' is Warren Buffett's, world's greatest investor, rule when investing. The three words, however, do not mean that you should not sell your investment holdings at the moment you start making losses. What Buffett's rule means is that you should always protect your portfolio and know the losses you are willing to go through in effort of increasing your wealth. One of the main concerns of traders and investors is the volatility of the market. The volatility makes the market to be merciless when you are hit by losses and generous when you are making profits. So, what's the way forward? One way for you as a trader to protect your portfolio and in this volatile market is starting to share CFDs.
Before proceeding to the ways you can use to protect your portfolio, let's refresh our minds on CFD. CFD is an acronym that stands for ‘contract for difference.' It is a type of derivative trading which involves a contract between a CFD provider and an investor or trader. The contract enables the investor to speculate on the price movement for a specific asset; however, there's no selling or buying activity involved. The primary goal of CFD trading is investing in the future price of an asset without physically selling or buying the asset. In simple terms, CFD trading enables you to trade on both rising and falling prices. Based on that refresher on CFD, you can see you have some form of protection over your stock portfolio.
Now let's proceed on and look at ways you can use to offer protection over your stock portfolio in this volatile market.
Add Non-correlating assets
Stock portfolios that comprise of twelve, eighteen or thirty places you in an unsystematic risk situation. Systematic risk will always be there even when you start to share CFDs. However, when you begin to add assets such as real estate, currencies commodities to a group of stocks, you'll be reducing systematic risk. It's because non-correlating assets behave differently to changes in the markets, unlike stocks. Additionally, the non-correlating assets provide more steady returns as they eliminate the highs and lows in your performance.
Diversification typically means coming up with in-depth and broad diversified portfolios. You can achieve this by owning several investments in more than one class of asset. Through this, you will be reducing the unsystematic risk that comes up when investing in a specific company compared to investing in the market which brings about systematic risk. A trader can also diversify through CFD trading, because, there is a broad breadth of assets, meaning abundance of opportunity. Therefore, don't stock all your holdings in one portfolio.
Set limit orders
During times of volatility, setting a limit on your orders helps to protect your portfolio as well as profit. Limiting orders work in a simple way. Limit orders are set when you want to buy or sell at a certain price instantly. Therefore, by setting a limit order to sell high or buy low, you'll end up making a profit. In times of struggle, the limit orders will provide you with an excellent way to design a stop loss strategy. In case of a crash, a limit order helps you to cut down the loss. It is a strategy that works great for both long and short term investments.
Pay your debts
Stock market volatility will never occur solo. Jobs will often get lost when stock markets start to shake. To make sure that you survive the market storm, pay down your debts. It's the best investment you can make. By reducing your debt, you'll be protecting your portfolio by avoiding to shell out your cash on paying interest. Moreover, you will be able to invest more money on cheaper stocks when the economy is not so nice.
Sell off stocks that are not relevant to you
Earlier, we discussed diversification. Well, this has a limit especially when the market is looking increasingly bearish. At such times, it is not a good idea to buy stocks that won't work well during market volatility or generally risky.
As a trader, it is advisable always to be ready to face any rough ride. Never lose money what should guide you at all times. With these tips, you'll weather the foul market and protect your portfolio at all times.