These days, it seems like the economy is constantly in flux. One day, the stock market is up: the next, it’s down.
With all this volatility, it’s more important than ever to ensure you’re taking steps to protect your money and investments.
Here are three Q4 strategies to protect your investments:
- Diversify, diversify, diversify
- Review your asset allocations regularly
- Have cash on hand
It may seem hard to protect your portfolio in an uncertain economy, but it doesn’t have to be.
Why you should diversify your investments
There are a few reasons why diversifying your investments is so important. For one thing, it helps protect your portfolio from losses. Your entire portfolio suffers if all of your eggs are in one basket.
However, you’ll be less susceptible to losses if you diversify your investments and include multiple asset classes—such as stocks, bonds, and real estate.
This is because if one asset class takes a hit, the other asset classes can help offset those losses. Additionally, diversifying your investments will help you ensure that your portfolio is well-rounded and capable of weathering any storm. Finally, diversifying your investments can also help improve your overall return on investment (ROI).
When you diversify your investments, you’re essentially hedging your bets and increasing your chances of seeing a positive return. All in all, diversifying your investments is one of the smartest things you can do for your portfolio.
How to diversify your investments
Now that we’ve gone over why diversifying your investments is important, let’s discuss how to do it. When it comes to diversifying your investments, there are a few different approaches you can take.
One approach is to invest in various asset classes—such as stocks, bonds, and real estate—which will help reduce the risk of losing money if one particular asset class takes a hit.
Another approach is to invest in a mix of domestic and international companies, which can also help mitigate risk. And finally, another approach is to invest in a mix of growth and value stocks, which can provide stability during periods of market volatility.
Why review your asset allocation?
While asset allocation can help you manage risk in your portfolio, it’s important to remember that no investment strategy is guaranteed to produce profits or protect against losses in a down market.
That’s why it’s so important to review your asset allocation regularly—ideally at least once per year—to ensure that it still aligns with your investment goals.
For example, let’s say that you initially allocate 50% of your portfolio to stocks and 50% to bonds. Over time, however, the value of your stock holdings may increase faster than the value of your bond holdings.
As a result, your portfolio may become “out of balance,” with too much exposure to stocks compared to bonds.
If the stock market went down sharply right now, you could lose a lot of money.
By reviewing your asset allocation regularly and rebalancing as needed, you can help ensure that your portfolio remains appropriately diversified and that you’re not taking on more risk than you’re comfortable with.
Why you should have cash reserves
Having cash reserves gives you the flexibility to take advantage of opportunities as they arise. For example, let’s say you’re looking at a stock that you think is undervalued and has the potential for significant growth.
If you have the cash on hand, you can buy shares of that stock immediately and start earning a return on your investments. On the other hand, if you don’t have any cash saved up, you’ll miss out on that opportunity.
In addition, having cash reserves helps you avoid selling off assets at an inopportune time to raise capital. For example, let’s say the stock market takes a sudden dive, and your portfolio takes a hit as a result.
If you need to raise cash quickly, you may be forced to sell off some of your assets at a loss to meet your financial obligations. However, if you have cash saved up, you can weather the storm without taking a loss.
Keep your emotions in check
Lastly, keeping your emotions in check when it comes to investing is essential. It can be tempting to sell all of your investments when the market is crashing or buy more when it is booming.
However, these emotional decisions can often lead to suboptimal results. You can best develop an investment plan and stick to it regardless of what the market is doing.
Conclusion
The past year has been unlike any other, with widespread economic uncertainty thanks to the COVID-19 pandemic. But even in these turbulent times, there are steps you can take to help protect your portfolio and ensure that it weathers any storm that comes its way.
By following the strategies outlined above—such as diversifying your investments and maintaining cash reserves—you can help ensure that your portfolio weathers any storm that comes its way.
Image by: [Gerd Altmann]