“Stock Picking vs Risk Management: Learn eight simple strategies to balance both and grow your investments with less risk!”
Jumping into the stock market can feel a bit overwhelming, especially when there’s risk involved, as things can go sideways fast.
That’s why balancing stock picking vs risk management is so important. When you match solid investments with a good risk plan, you’re setting yourself up for better results.
In this post, I’ll share eight simple and effective strategies to help you balance stock picking and risk management.
These easy-to-follow tips will show you how to get the best of both worlds
Let’s get into how you can use these strategies to stay steady and confident in your investment journey!
1). Use the Core-Satellite Approach
The “Core-Satellite” approach is all about keeping your investment portfolio steady while also allowing some room for growth.
Here’s how it works: you start with a “core” of stable, low-risk investments—things like index funds or blue-chip stocks. These are the dependable parts of your portfolio that give you consistent returns without too much worry.
Then, you add your “satellites”—higher-risk, high-potential investments like smaller companies or emerging markets. These are where you take a bit more risk but with the chance for bigger rewards.
This mix helps you balance risk and reward. Your core holds everything together, providing a steady foundation, while your satellites give you the opportunity to grow faster without putting everything at risk.
This way, you can aim for growth while still keeping a solid footing.
2). Implement a Value AveragingTechnique
Value averaging is a smart way to manage your investments.
Here’s how it works: instead of investing a fixed amount each month, you adjust how much you invest based on market prices. When prices are low, you put more money in. When prices are high, you invest less.
For example, imagine you’re investing in a stock that’s worth $50 today. According to your plan, you buy $500 worth of stock, getting 10 shares.
If the price drops to $40 next month, you invest $600, buying 15 shares. But if the price rises to $60, you invest only $400, buying about 6.7 shares.
By buying more when prices are low and less when prices are high, you can lower your average cost per share over time.
This approach helps manage risk by avoiding buying too much when prices are high and can potentially boost your returns in the long run.
3). Embrace the RebalancingHabit
Rebalancing is an important part of keeping your investments on track. Over time, some of your investments will yield faster than others, which can throw off your risk levels.
For example, if your stocks do really well and your bonds don’t, you might end up with more stocks than you planned for.
To keep things balanced, set up a simple rebalancing schedule. Maybe check your portfolio every three to six months.
If you see that your stocks have grown too much compared to your bonds, it’s time to move some money around. Sell a bit of the overgrown investment and buy more of the underperforming one.
If you find that your portfolio has too many of one kind of investment, it’s time to put things back in order.
Keeping up with this habit will helpmanage risk and keep your investment plan on course, just like in the story of Investing.
4). Use Scenario Analysisto Prepare
Scenario analysis helps you see how different market conditions might affect your investments. It’s like playing out “what if” situations to prepare for the unexpected.
Imagine you’re testing your investment strategy in various “what if” scenarios, like if the market crashes, if there’s a sudden economic boom, or if interest rates change.
For example, let’s say you have a mix of stocks and bonds. You can use scenario analysis to check how your investments would perform if the stock market fell by 20% or if interest rates went up.
By looking at these possibilities, you can see how your portfolio might be affected and make adjustments to protect yourself from big losses.
5). Apply Trailing Stopsfor Protection
Trailing stops are a great tool to help you protect your investment gains and limit losses. Imagine you buy a stock at $50, and it goes up to $70.
You can program a trailing stop to automatically sell the stock if it falls by a certain percentage from its highest price.
For example, if you set a trailing stop at 10%, the stock will be sold if it drops to $63 ($70 minus 10%).
To set up trailing stops, first decide how much of a drop you’re willing to accept. Then, set your trailing stop order based on that percentage. This way, you lock in your gains while giving your investment room to grow.
Using trailing stops helps you avoid the stress of constantly watching the market and makes sure you don’t lose too much if prices start to fall. It’s a simple way to keep your investments safe and sound.
To use scenario analysis, start by picking a few different scenarios and see how they impact your investments.
Regularly updating this can help you stay prepared for any surprises. This approach is useful for anyone in finance jobs or managing their own investments.
6). Practice Position Sizing
Position sizing is about deciding how much money to invest in each stock based on how risky it is. Imagine you have $1,000 to invest.
If you want to invest in a pretty stable stock, you might put $500 into it.
But if you’re looking at a riskier stock, you’d put in less, maybe $200. This way, you’re not putting all your eggs in one basket and risking too much on one investment.
To figure out the right size for each investment, start by assessing how much you can afford to lose on that stock. If your max loss is $50 and the stock price is $10, you would buy 5 shares.
This method helps you balance potential gains with potential losses and keep your investment strategy safe.
7). Use Technical Indicators for Timing
Technical indicators are tools that help you figure out the best times to buy or sell stocks.
It involves tools such as moving averages and the Relative Strength Index (RSI), which can really help with picking stocks and managing risks.
For example, moving averages show the average price of a stock over a period like 50 days. If the stock price is above this average, it might be a good time to buy.
RSI tells you if a stock is overbought or oversold. If the RSI is above 70, the stock might be overbought and could drop soon. If it’s below 30, it might be oversold and could go up.
Using these tools helps you decide the best times to enter or exit a trade.
8). Develop a Stop-Loss Strategyfor Emotional Control
Stop-loss orders are essential for keeping your emotions in check.
They automatically sell your stock if it declines to a price you set, helping to prevent bigger losses. This way, you don’t have to make tough decisions in the heat of the moment.
For example, if you buy a stock at $50, you could set a stop-loss at $45. If the stock falls to $45, it sells automatically, so you don’t lose more than you’re comfortable with. This helps you avoid panic selling when the market turns volatile.
To set effective stop-loss levels, decide how much risk you’re willing to take before you invest.
Set your stop-loss at that level and stick to it, even if the market gets shaky. This strategy keeps your emotions out of trading and helps you make more objective decisions.
Conclusion
We’ve gone through some key strategies to balance picking stocks and managing risks.
From using scenario analysis to see how different situations might affect your investments to setting up trailing stops to protect your gains and practicing position sizing to manage your money better.
Now, it’s time to put these strategies into action!
Start by picking a few that resonate with you and begin incorporating them into your investment routine. Remember, the key is consistency and adjustment as you go.
If you’re looking for the best in asset management, ITUS Capital is a top choice. They offer a transparent, performance-linked fee structure and are committed to long-term growth.
Their passionate team manages client assets across 10 countries, providing personalized care with a focus on protecting and growing your wealth.
Start applying these strategies today and consider reaching out to Itus Capital for more tailored advice.
