It’s every investor’s nightmare. You buy the wrong stock at the wrong time, leap into a hot sector just as it turns cold, or lose your balance in a wider stock market crash. Result: Wipeout!
If you are investing in individual company stocks, you have to accept that it could happen to you.
Small-cap investors know they risk a soaking. And during the financial crisis, investors in the big banks also got drenched.
Here is how you can avoid getting wiped out.
Learn How To Value A Stock
If you are picking your own shares, you must do more than check newspaper headlines and past performance figures.
You are effectively gambling with your own money, so you need to know the odds. Is the share price underpinned by earnings? The price/earnings (P/E) ratio will tell you. Does today’s price reflect how the company is growing? The price-to-earnings growth (PEG) ratio may show you the future. What is the real value of the company’s assets. Find out from the price-to-book (P/B) ratio.
These won’t tell you everything, but they will tell you a lot more than you knew before.
Spread Your Risk
Buy too many stocks and you dilute your chances of beating the market. But if your portfolio is too concentrated, one flop can wipe you out. Only you can decide how much risk you are willing to take. But even if you are assembling a portfolio of racy AIM-listed start-ups, you need to spread the risk around.
Don’t Run Your Losses
People hate making mistakes, and they hate admitting to them even more. That’s why so many investors cling onto companies whose prospects have been sunk. They hope that by sticking around they will eventually claw back their losses. There are times when you have to grit your teeth and admit that you got it wrong. Then find a better home for what’s left of your money.
Consider Stop-Losses
Some people swear by stop-losses. They employ them as part of sophisticated trading strategies, to limit the downside of any trade. The danger is that they don’t just stop your losses, but also lock them in. This strategy can backfire with volatile stocks, triggering a sale when the share price briefly dips, then locking you out of the subsequent rebound. Use with caution.
Keep It Simple
Work out why you are investing. Do your research. Only buy stocks you understand. Don’t invest money you can’t afford to lose. Track the share price before you commit yourself. Review your portfolio regularly. Don’t get greedy: get-rich-quick investments are the fastest way to wind up poor. Finally, enjoy the ride.