5 Tips on how to avoid losses in your investments.

In my previous post I spoke to you about my journey in discovering how to conquer my fear of investing and how to invest in a way that protected me from losses. One of the things I recall is hiring an investment adviser early in my career and investing in the products he recommended to me.  One of the problems I had with him was that I had no way of telling if he was giving me good advice and I simply had to trust him.  I was never comfortable with that and so my journey to discovery began.  Over the course of the years I identified the following 5 ways to avoid losses:   

1. Diversify your portfolio across multiple investments.  Primarily these should include stocks and bonds and within those you can diversify across companies, markets, industries and strategies.  Generally, the more stocks you can add to your portfolio, the less risky your portfolio will be.  Keep in mind that despite the various stock market crashes the S&P 500 index has had a positive 10% return on average over the course of its history.
2. Probably the biggest risk decision an investor can make is the allocation between the two broad categories of stocks and bonds.  Stocks tend to be more volatile (they go up and down in value frequently) whereas bonds have a more predictable income stream (regular payments of interest and/or principle).  Generally, the greater your allocation in stocks, the greater the risk of your portfolio.  As a general rule between 60/40 to 40/60 stocks versus bonds is a reasonably conservative ratio.
3. Discipline: it can require discipline in the face of a stock market crash to maintain your investment.  You have to keep in mind that if you are invested for the long-term that your portfolio will suffer quite dramatic losses during times of crisis.  But what we have seen is that in spite of major financial crises, when in some cases the stock market suffers major losses, it soon bounces back.  The S&P 500 for example, lost 37% of its value in 2008.  But it gained 26% in 2009 and 16% in 2010.  If you drop out of the stock market in the face of losses then you may also miss out on the recovery thus making your loss much worse than it needs to be.
4. Avoid a herd mentality. There was a huge bubble in real estate in many countries prior to 2007 and many ordinary people were financially ruined when their real estate investments were devastated by the bust.  These people rushed into these investments without considering the risks or whether these investments were appropriate for them.  In some cases, these people were 100% invested in real estate and lost all of their wealth.  They disobeyed the key principle of investment: diversification.  But they also did not have the knowledge of the fundamental investment principles that could have protected them.
5. Implement this strategy by investing into funds.  There are more funds than you can shake a stick at.  ETFs, Index Funds, actively managed funds, real estate funds etc. (Don’t worry if you don’t know what these are, I can explain them to you).  The point is that you can relatively easily invest into these diversified funds rather than buying individual stocks or going through the long drawn out process of buying a second house for letting (and managing it too – good lord!).

We’ve gone over a lot here and it may seem overwhelming.  So, in my next post I’ll talk about how one of my clients was able to successfully apply these principles to his own life and really improve his investment outcome.  And you can too.

In the meantime, if you have any questions or if I haven’t explained anything well enough please feel free to shoot me an email and let me know.

P.S.  If you’d like to speed up your understanding of these principles click this link right now and we can make some time to chat.