In the investment arena, you can either choose to take an aggressive or a conservative approach. Aggressive offense means investing in successful companies with the hope that it will go on outperforming. Conservative offense means identifying the stocks that can get undervalued and invest only when the price reaches a specific point based on technical or fundamental analysis. The end result of both the offense approach is to increase your wealth.
People can even read the weekly magazine, ‘The Private Investor’, where stock investment analysis and techniques get covered as per Prof. Otte, a great book author, economist, political activist, and money manager.
Investors need to not just consider an offensive approach but also have a supportive defensive plan. Watching your long-term investment grow is great but what if it did not grow or you lost it. Therefore, a defensive scheme or an investment risk management strategy is also essential.
The first investing rule is ‘Never lose money’ and the second rule is ‘Always remember rule no 1’.
It is normal to take some risks for increasing your wealth, but having a system to defend your capital in a non-favorable situation is also imperative.
Investment risk management strategies
Follow the trend – Buy ETFs or stocks, which are in an uptrend, and sell them the moment they defy their support trend line.
Rebalancing – Long-term investors periodically sell assets or stocks that take a lot of their portfolio to buy underperforming stocks or ETFs. It is an aggressive way to buy low and sell high.
Position sizing – Limit your exposure to the risky sectors or avoid it. Invest a small capital amount in risky sectors like small-cap stocks. Many investors do this because they feel that a 40% loss on 3,000 investments is less painful than a $30,000 investment.
Stop-loss order – It is a way to limit portfolio damage and strictly get defensive. The price is set low enough to get pulled back and high enough to limit the capital loss.
Diversification – Buy truly dissimilar asset categories. It means if one accelerates the other will possibly decline.
These are proven defensive strategies that investors have been using for investment risk management.