In investing, just like in life, there are no guarantees. The only thing you can be somewhat certain of, is that there will be a few dips along the way where the value of your investments drop, hopefully before rising again.
The longer you’re in the game, the better your chances of walking away a winner.
But the longer the ride, the more impatient or anxious you may feel about your portfolio. There are ways to safeguard your investments over the long term. Here are 6 effective methods to help you minimize your losses in the stock market:
In case you don’t have years of experience behind you, it’s always good to keenly observe the market patterns during the first half of the trading day, and take any investment-related decisions only during the second half. The first half of the trading day is usually driven by emotions, impacted by the effects of the day before and any overnight movements. It is only in the later part of a trading day that the actual trends may appear.
Identify different market phases
You must be able to see through different market phases and make your investment decisions accordingly. For instance, find out if the market is currently in a trending phase or a trading phase, and accordingly sell/buy breakouts. The inability to identify the current market sentiment can result in major losses.
Don’t hurry into profit booking
Although it may seem very tempting to book your profits immediately, you should hold onto your horses as long as the market seem ok. By opting to book profits early, you may let go of the substantial trends, despite having a nice position in the market.
In case you are very keen on securing your profits, do it in different stages, leaving enough scope for returns-maximization later.
Treat every trade like just another trade
No matter how good or bad the market conditions may be, you must always treat every trade like just another trade. Expect no more than normal profits. Although supernormal profits may also come your way from time-to-time, you shouldn’t expect them regularly. Furthermore, you must increase your risk appetite only if your equity investments have grown big enough to handle such increased risk.
Diversify, but don’t go overboard
It’s never a good idea to put all your eggs in one basket. And that’s where the concept of diversification comes into the picture. No matter how good/bad the markets may be, you may always end up on the winning side if your portfolio is well-diversified. In fact, investment-diversification is a must for risk mitigation.
Although diversification is important, you must avoid over-diversifying your investments as being invested into too many different stocks may seriously compromise your returns.
Never invest in a stock solely based on its past performance
We all know that stock markets move in different phases. So, if the market is on its way up in one phase, it may come crashing down in another. Such movements are greatly dependent on the performance of an economy as a whole. Hence, the stock markets will go up/down depending on how well a country’s economy is doing.
As a result, a stock that delivered great returns last year, may/may not deliver the same kind of returns now. The returns delivered today will depend entirely on the state of the economy, market conditions and the company’s health as of today. Although there is nothing wrong in checking the past performance of a stock, you must avoid depending entirely on it.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.