So you’re just new to stock investing. You’ve identified your value stocks, bought it and now you’re putting a sizable amount of your salary in it every month. I congratulate you for that. 🙂
However, one concept we have to keep in mind now that we are investing is the concept of risk. Most people are scared with high risk investments but by learning to manage it increases our future rewards. Now what do we do with risks?
3 important things to remember in managing risks in the stock market
Diversify.
One basic advice that you can follow is that if you plan to diversify in 10 individual stocks, put a maximum of 10% in any one position. And also consider investing in retail treasury bonds. For risk takers, consider 20% bonds and 80% stocks but for the conservative investor, consider 40% bonds and 60% stocks.
Balance your portfolio.
If you own 2 individual stocks starting at 50% each and after a year of volatility you now have 60% and 40% each, consider selling 10% of the good performing stock to buy 10% of the under performing stock to re-balance your portfolio. Same is true with different asset classes. Let’s say you plan to diversify on 20% bonds and 80% stock. When the market falls, you now have 70% stock and 30% bonds. To balance your portfolio, you now sell 10% of your bonds and buy 10% worth of stock to get it back where it once before.
Manage your emotions.
If you buy on greed and sell on fear, you’ll lose money. And I quote Warren Buffet, “Risks comes from not knowing what you’re doing.”
Building wealth through stock investing is a very rewarding experience but to do so, we have to manage the risks involved so that we won’t lose money.
Happy investing!