How to protect your long-term stock investments?

Long-term investments include investments from one year, although in some classifications capital invested for 1-3 years is considered a medium-term investment. However, we will consider the shares purchased for subsequent sale no earlier than a year later, a long-term investment. In order for such an investment to justify itself in terms of profitability, the investor should carefully approach the choice of companies. They should have good prospects for development, plans to expand, increase production volumes. In addition, key performance indicators that are reflected in quarterly reports are important. Investing in stocks involves the use of such tools as fundamental analysis (just the same indicators) and technical analysis – an attempt to predict the future price of the stock based on graphs of past prices and transaction volumes.

Having made a choice in favour of certain shares, it is desirable for a private investor to determine at what price, at least approximately, he or she will sell these shares. But in reality, more people lose money than they earn on buying and selling shares. There are several reasons for this: a random choice of companies, buying or selling based on emotions, general unpreparedness to work with the stock exchange. After all, many simply don’t learn how to protect their capital. An additional problem for all investors is the over-advertising, free information and personal opinions about investments in company stocks. Relying on all this information is risky and even dangerous.

However, it is not an option to refuse to invest in this type of securities. First, the advantage of long-term investments in stocks is that they themselves avoid many mistakes. Short-term stock market fluctuations are almost unpredictable, while long-term fluctuations are projected to a certain extent. Having set a minimum period of ownership of shares in 1 year, the investor will not twitch on every occasion and react to the daily news, haphazardly changing the composition of the portfolio. Secondly, there are several ways to protect your long-term equity investment.

Distribution of investment

In other words, investment diversification. It can and should affect not only distribution by company but also by the industry as well as by country. Investing your capital in one or two companies is allowed only if you are a very experienced and at the same time risky investor or if the amount of free capital does not exceed $5,000. Everyone else, including the average investor, is advised to keep shares in the portfolio:

  • 3-4 companies with a capital of $5,000 – $10,000;
  • 4-5 companies with a capital of $10,000 – $25,000;
  • 5-6 companies with a capital of $25,000 – $50,000;
  • 6-7 companies with a capital of $100,000.

It is fair to say that diversification has more than just supporters. After all, asset allocation is a kind of insurance against the subsidence of the share price, which in most cases is caused by poor analysis and lack of information about the company. So isn’t it better to study and buy shares of three companies in detail than to look at six superficially, hoping that even if two of them show a negative result, the remaining four compensate for it? And to closely monitor will be only a small number of shares, including in the long term, which means more effective risk control.

As you can see, these two approaches to diversification are based on one on risk-spraying, the other on increased selectivity. Which of them is the golden mean or closer to it, the subject for disputes, but in practice the decisive factor is the experience of the investor and his financial and economic knowledge. The more experience and knowledge, the less diversification of the portfolio of shares can afford the investor.

Risk management

The skill of self-analysis of shares is not acquired at once: a private investor will be required to make some effort and spend time. After all, the number of shares on the New York exchange is – four thousand-plus. Of course, this is not about analysing them all. But even just correctly to identify the most promising, both in terms of growth and dividend yield – this is a serious and difficult task for many.

What if there is a desire to invest in stocks for the long term, not to take risks or not to risk at all, but also to provide a yield that would be an order of magnitude higher than inflation and deposit rates?

In the stock market, there are equity-based financial instruments that involve risk control – these are structural products. In fact, they can include not only stocks but also indices, bonds, currency, etc., as they represent a ready balanced portfolio. Structural product is arranged in a complex way: there is a protective part that will preserve the initial capital of the investor, and there is a profitable, working for profit.

What is especially important, for structural products have already selected certain shares of companies, which on the aggregate parameters can be attributed to the most promising. That is, the difficult task of selecting shares, which is with self-investment, has already been fulfilled for the investor. All it has to do is to find a structural product with suitable capital protection: full or partial. We should note an important point here: as such, the ownership of shares from the investor who has issued the structural product does not occur, but the income depends on their value (at the time of tracking and at the end of the term of the investment).

PIFs and index funds

The alternative may be shares of investment funds working on shares. However, this option is only good because the PIF is a ready diversified portfolio and that for it was analyzed companies with the choice of the best, in the opinion of the manager, shares. There is no question of capital protection and guaranteed return of the original amount in the case of investment funds. You can only count on the experience and knowledge of the manager. Equity PIFs can be recommended for investments of more than 12 months.

Otherwise, index funds traded on the stock exchange are arranged – ETF. They also include several shares (although these may be other securities), but the “shares” of the fund are issued and traded on the stock exchange already this fund. Since the ETF belongs to the derivatives class, its liquidity is lower than the liquidity of the shares. In a growing market, index funds may be of high interest to investors focused on long-term equity investments.

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