Traders are always seeking to bolster their financial portfolios. The whole point of dabbling in the markets in the first place is to increase your net worth over time. For many of us, this appears to be an insurmountable challenge, given the complexity of reading financial indicators and acting with purpose.
5 Ways to Protect Your Financial Portfolio
A novice entering the trading scene may quickly be overwhelmed by the charts, numbers, signals, and regulations. Fortunately, there are many ways to shore up your trading activity and stabilize your portfolio.
1. Diversify your portfolio
‘Don’t put all your eggs in one basket’ is an age-old aphorism that holds true to this very day. Concentrated investments in 1 or a handful of options are dangerous. This is especially true in the case of individual stocks, currencies, commodities, or indices. To guard against losses, financial experts recommend that traders and investors dabble in multiple underlying assets. Individual stocks such as MCD, AAPL, GOOG, and others can move in any direction at any time.
However mutual funds are an aggregate of a sector or an industry, and they average out the performance accordingly. Mutual funds are an effective way of protecting your financial portfolio from the potential hazards of individual stock price movements. To this end, it’s important not to invest more than 5% of your holdings in any individual stock.
2. Use trading strategies
Trading strategies are designed to pick the right investments at the right price. A trading strategy should be used in conjunction with effective money management techniques. Without a plan mapped out, there is no way to reach your destination as a trader. Strategies make it easy to improve your performance.
By using effective CFD trading strategies, it is possible to completely remove emotion from the equation, boost your chances of success, and solidify your portfolio. Besides, effective trading strategies guard against overtrading, by limiting activity accordingly.
3. Inject more cash into your portfolio
To grease the wheels on your investments, you need the wherewithal to make it happen. Cash is an effective hedge for a financial portfolio since it makes it easy to protect against declining assets. If a portfolio has a total value of $50,000 ($25,000 in stocks and $25,000 in cash) a 10% decline in the value of stocks would reduce the portfolio to $22,500 + $25,000. That means the portfolio is down to $47,500, or 5% overall. The cash component kept the value of the portfolio stable.
4. Diversification into uncorrelated assets
Uncorrelated assets are assets that have no connection with one another. These include stocks, commodities, indices, and currencies. Assets are typically divided up by class. If you invest too much in one asset class, you run the risk of loss if things go pear-shaped.
Uncorrelated asset investment is a form of hedging in that you’re protecting the value of your portfolio against shocks in individual components. When equities markets sour, commodities like gold and silver typically rally. When the USD appreciates, commodities like gold tend to depreciate, etc. To this end, it is always advisable to trade your preferred underlying assets on as broad a platform as possible. International markets are a good place to start.
5. Gold is a viable investment
All traders know that gold is the ideal safe-haven investment. When indices markets are weak (a risk off approach is adopted), gold tends to prosper. There is evidence of this throughout history.
Traders and investors flock to gold whenever there is geopolitical uncertainty, and it holds its value well under those conditions. Therefore, gold should always be considered as part of a financial portfolio. Many central banks around the world use gold resources/reserves to base their monetary policy decisions on.