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INVESTMENT: Protecting Your Portfolio like a Pro
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Protecting Your Portfolio like a Pro

By Michael Dow

BT 201505 26 Investment Emirates NBD 1We are often told that investing is risky. Strictly speaking, it is a risky endeavour - particularly when you don't do your homework and fail to put the right safety mechanisms in place. Then of course there is the intrinsic volatility of stocks, bonds and currency and real estate markets that affects the valuation of your portfolio. The truth of the matter though is that with the right approach to asset protection you can make money throughout your life without getting wiped out.

The first thing to do is research your deals properly form the outset. This is obviously one of the most basic aspects of investing, yet so many people fail to do it properly. Before you put your cash to work it is absolutely paramount that you carry out an exhaustive analysis of things like past performance, the price to earnings (P/E) ratio, dividend consistency, future growth projections and the amount of debt a company or set of companies have on their books. You will also need to look into the wider sector, the country where the assets are based and the currency they are denominated in so that you can get a feel for future prospects. As legendary Wall Street trader Michael Morris once said, "Doing your homework isn't guaranteed to protect you from a downturn but it is a damn good start".

BT 201505 28 Economy hlAnother basic principle that is often disregarded is diversification. Now and then you will hear financial commentators say things like "diversity is boring", or "you have more chance of making quick cash from an individual stock or property surging in value than an index fund, ETF, REIT or mutual fund". Both of these notions are true. Then again, most of the people who say these kinds of things either have enough spare money kicking around or they manage other people's cash for a living. As Miranda Marquit has pointed out, "Part of building a successful investment portfolio includes managing the risk that comes from investing so as to limit your losses and enhance your gains as much as possible. Without diversification, your portfolio could be completely wiped out if one market crashes, or if an industry sustains prolonged losses. Diversification is one tool in the arsenal that allows you to take calculated risks designed to help you build wealth through investing".

There are several ways in which we can and must diversify our portfolio. The first is asset classes. For maximum protection against volatility one really has to own a variety of different kinds of investments over the course a lifetime. Primarily this should include stocks, bonds (corporate and government) and real estate. These asset classes are the bread and butter of most people's portfolio. However, some individuals prefer to diversify even further by hoarding a so called 'basket of currencies', acquiring gold or other precious metals, investing in commodities or engaging in other passive income streams like peer to peer lending. When you've figured out the right overall balance for you, the next step is to become a global investor. In other words, you need to become geographically-agnostic. Rather than just buying into the main stock markets or blue chip companies in your country of origin you need to scour the global markets for better opportunities. Nowadays it is easier than ever to invest in foreign assets, all you need is the right stock broker. Finally, if you really want to diversify like a pro you need to buy broad sets of assets like index funds, bond market funds, REITS and ETFs. The gains might be slower as you are betting on an entire sector of the economy but these instruments tend to be less volatile over the long term and they increase the chances of getting consistent dividend payments.

BT 201505 27 Investment lending and investmentThese methods are fairly straightforward. Anyone can learn how to analyse potential investment opportunities and diversify a portfolio with a little bit of financial education. But there is another method which the professionals use on a daily basis...stop orders and call options. In investment guru Robert Kiyosaki's book Retire Young Retire Rich he points out that "The average investor only has two choices once the market changes direction: buy or sell. A sophisticated investor may call their broker and request a stop order if they think the market is going down, especially if it is in a downward trend". The idea behind a stop order is fairly simple. If your asset is trading at 100 USD and you suspect it will plummet you simply ask for a stop order at 95 USD. When the price falls to 80 USD you still have the right to sell it 95 USD, thus saving yourself from a loss of 15 USD per share. Kiyosaki also mentions call options, which as he says "gives the owner of the option the right to buy stock at a certain price per share over a predetermined period of time". Again, the way these tools work is pretty simple but so many people fail to take advantage of them. If you suspect that a bull market cycle is about to kick off then you simply call your broker and request to buy X amount of shares at Y price at some point down the road. For example, if the stock of ABC company is trading at 50 USD. You call the broker and say you want to buy 100 shares for that price in a months' time. It may cost 100 USD or so to 'make the call' but if the share price increases to 60 USD you would make 900 USD profit for your trouble.

Protecting your portfolio by using each of these methods is like taking out an insurance policy. Very few people these days drive a car, go on a round the world tour or even leave their house for work without having some kind of insurance in place to protect themselves. Yet time and time again people make this crucial mistake when it comes to their investment portfolio. Investment doesn't have to be so risky. All it requires is a bit of time, effort and common sense.


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