The key to long-term success with stock investments in maintaining capital. One of the main rules of the famous investor Warren Buffett sounds like this - never lose money.
This does not mean that you need to sell the entire portfolio as soon as the price of the shares included in it starts to fall, but you need to carefully monitor it and balance the assets. It is impossible to completely eliminate the risk of investments, but there are several strategies that help reduce it.
The editors of the portal Investopedia published material
describing six popular asset protection strategies for trading on the exchange. We have prepared an adapted version of it.
The cornerstone of Modern Portfolio Theory (MPT). According to her, in times of market collapse, a well-diversified portfolio will show better results than those involving a small set of assets.
Diversification is to create a portfolio that includes a wide range of different financial instruments and assets of different classes. This allows you to reduce the unsystematic risk that arises when investing in a particular company - as opposed to the systematic risk that arises when investing in specific markets as a whole.
2. Investments in uncorrelated assets
Some financial experts are confident that a portfolio of 12, 18, or even 30 stocks can reduce unsystematic risk to almost a minimum.
At the same time, systematic risk is always present in any case, but it can actually be reduced by investing in non-correlated asset classes - for example, in bonds, currencies, stock baskets. In this case, the investor will be able to get a portfolio of assets less vulnerable to volatility and reduce systematic risk.
The main idea here is that unrelated groups of assets react differently to market events. Therefore, in case of conditional problems in the currency market, steady growth can continue in the stock market and vice versa. When one asset falls in value, the other continues to grow.
It is important to understand that this strategy not only reduces probable losses, but also limits possible profits. Incomes as well as losses become more balanced. In addition, there is a theory that states that assets that were previously uncorrelated can repeat each other's movements in the future. In this case, the effectiveness of the strategy will decrease.
3. Optional strategies
Between 1926 and 2009, the S&P 500 index fell 24 of 84 years (25% of the time). Typically, investors seek to protect their earnings by capturing them in time. However, it often happens that selling an asset that has already brought money may not be the right decision, because then growth continues. In this situation, several different methods are used to protect profits.
One of them is to put put options - they are a bet that the underlying asset will fall in value. In contrast to the short sale of shares, the option gives the investor the opportunity to sell the asset at a certain price in the future.
For example, suppose an investor has 100 shares of Company A, which have risen in price by 80% in just a year and are trading at $ 100 per share. The investor is confident in the bright future of the company, but understands that its securities were growing too fast, which means that there is a possibility of a price reduction in the near future.
To protect earnings, he can buy a put option on shares of company A with an expiration date in six months, with a strike price of $ 105. The price of this option will be $ 600 - at six dollars per share. As a result, the investor will have the right to sell 100 shares of company A at a price of $ 105 in six months. If by this moment the stock price drops to $ 90, the option price will rise significantly. Its sale will help offset losses due to lower stock prices.
4. Stop loss
The easiest way to take profits and reduce the risks of financial losses. Using the trading terminal, the investor can place an order such as stop loss. Its essence is in setting the price level of an asset, upon reaching which a sale takes place.
For example, you bought Sberbank shares at 232 rubles, and then they grew to 240 rubles. You can sell all shares at once and take profits, but what if they rise in price yet? In this case, it makes sense to establish a stop loss order at the level of 239/240 rubles. If the stock price continues to rise, you can “pull up” the protective order to a new level. If a decrease in the value of securities occurs, then you will not lose anything from the money earned.
There are also so-called sliding stop orders, which are automatically rearranged when the stock price rises according to predetermined parameters. Stop loss and trailing stop orders are available to users of the SmartX terminal
Investing in companies that pay dividends is another way to protect against potential losses. Historically, dividends have been considered as one of the most important elements of the total income from investments in securities. In some cases, it was generally the only income.
There is research proving that companies that pay dividends usually increase profits faster than competitors who do not pay investors. A higher growth rate also leads to higher stock prices - as a result, investors are in positive territory twice. The link
provides a calendar of dividend payments by Russian companies.
6. Use of structural products
Investors who are seriously concerned about protecting their assets use so-called structural products
. Their essence lies in the possibility of choosing acceptable risk parameters. As a result, the risk of financial losses can be completely eliminated. This reduces possible profits, but provides guaranteed protection - in case of unfavorable dynamics of the underlying asset, the company will regain absolutely all of the invested amount.
The profitability of a structural product depends on the participation rate and changes in the value of the underlying asset (stock, index, etc.). If the investor chooses a participation rate of 80%, and the price of the underlying asset has changed in the direction he needs by 10%, then the income will be 8%. That is, if you invest directly in the underlying asset, you could earn a little more, but with a much higher risk.
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