Follow the Rules, If You Have Any?
Investing in the stock market is stressful for many investors and the stress and emotions can lead to poor decision making. Avoiding bad decisions is a key component of achieving market-beating returns. However, no matter how seasoned you are as an investor, emotional decision making is difficult to avoid in times of market turbulence. The best investment strategies are not only great at identifying excellent stocks, but they also should incorporate a plan for risk management. At a minimum, a risk management plan should include portfolio based rules that guide an investor’s decision on when to sell a stock or another investment vehicle.
Developing a great risk management plan should be based on research that supports your decision making process. Coming up with random instructions that are not grounded in research will leave investors without confidence and can ultimately lead to bad decisions. Also, a solid risk management plan has to address sell decisions at both the individual stock level as well as the entire portfolio especially for smaller and more agile portfolios like those we build here at Investoristics. The best way to start building your risk management plan is to piggyback off the research of others if applicable or do your own. Individual stocks held in a portfolio should not be allowed to fall below a certain value after purchase. Limiting losses on your entire portfolio is after all an integral part of managing risks, particularly in the event of flash crashes when stocks go down very quickly over a short period of time.
Having risk management plans in place to manage your investment portfolio can take the guesswork, emotions, and fear out of the decision making process when it comes to selling stocks. We have all been there, wondering if we are making the correct decision to sell a stock and thinking that if we sell, it might come back. However, with the right investment strategy, there is no need to worry, since great stocks will always be identified for purchase even if it means repurchasing a stock that you previously sold. Every investment strategy is different to some degree and therefore your risk management plan will have to complement your investment style or strategy. In the end, successful investors should all have a well thought out risk management plan and without one, poor decisions are likely to be made, especially in challenging markets.
For the retail investor, it might sound a bit time consuming to think about risk management and it is, if you want to develop a great plan that fits your needs. We also know that there are those of you who are busy and just want some guidance and portfolio ideas that go beyond the basic choices available to most retail investors. At Investoristics, we provide a great opportunity for those investors looking to maximize their wealth by providing access to our market beating portfolio management newsletter. All you need is an open mind and your own brokerage account and you are on your way to market beating returns with lower risk relative to any relevant benchmark. Ready to get started? Contact us today to find out more.
