One of the hardest truths to accept about investing is that you’ll probably lose money at some point. It happens to everyone, even the billionaires. There isn’t anything you can do to control the market, but you can take steps to minimize your losses by choosing your investments carefully. Here are three signs you’ve already built a resilient investment portfolio.
1. It’s diversified
Everyone should own at least 25 stocks across a few different industries to reduce their risk of loss. It can be tempting to invest everything in a handful of popular tech companies, but even this industry can experience setbacks. If all their stock prices plummet, so does the value of your investment portfolio. That’s especially dangerous to those who are planning to withdraw funds from their account in the near future.
By purchasing at least 25 different stocks, you spread your money around so no single company or industry has too much of an effect on your portfolio. When one stock falls, you’ll probably have others that are doing well and that can help keep your losses to a minimum.
If you don’t feel comfortable picking stocks, consider investing in an index fund instead. These are bundles of stocks you purchase together, and they often consist of hundreds of top companies. They’re called index funds because they’re designed to mimic the performance of an underlying index, like the S&P 500.
Going with one of these gives you instant diversification in a single purchase. It also helps keep your costs low. Many popular index funds only charge you a couple of dollars per year on a $10,000 portfolio.
2. You focused on strong companies
Investing for the long term is the best strategy for most people. You should only invest funds you don’t expect to use in the next five years or so. That means you should focus on companies you expect will still be doing well at that point.
Investing in index funds, as discussed above, is a great way to do this. In order to earn a place on these indices, companies have to be at the top of their industries, and that’s a good sign they’re going to be around for the long term.
You want to stay away from meme stocks and companies that are steadily losing market share to their competitors. They’re probably not going to be doing so well in a few years, and if you invest in them heavily, you could face huge losses.
3. You’ve invested an appropriate amount in stocks
Stocks are typically seen as riskier investments than bonds, but they also have much greater earning potential. Limiting your exposure to stocks is crucial to avoiding huge losses, but you also want to be careful not to pull too much of your money out of stocks. Doing so might give you a less volatile portfolio, but your investments will also grow more slowly. And you’ll have to set aside more of your own money every month in order to reach your investment goals.
A good rule of thumb for how much to invest in stocks is 110 minus your age. So a 30-year-old would keep 80% of their savings in stocks and 20% in bonds while a 50-year-old would have 60% in stocks and 40% in bonds. As you can see, you move your money into less volatile assets a little at a time over the years so you can protect what you have while still capitalizing on the high earning potential of your stocks for as long as possible.
This assumes you’re investing for retirement, though. If you’re investing for a shorter-term goal, you may have to move your money out of stocks more quickly as your planned withdrawal date approaches.
But again, if you expect to use your money within a few years, you’re probably better off not investing it at all. Consider a high-yield savings account or a CD instead. This way, you won’t have to worry about losing money at all. If you choose to invest this money, you could be forced to take a loss if you have to withdraw your funds at a specific time.
Even if you follow the tips above, you’ll still have to weather some of the ups and downs that come with investing. But if you’ve done these things, you probably won’t have to worry about any major losses. Check in with yourself a couple of times per year and make adjustments to your portfolio as needed to keep moving in the right direction.
10 stocks we like better than Walmart
When our award-winning analyst team has an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now… and Walmart wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
Stock Advisor returns as of 2/14/21
The Motley Fool has a disclosure policy.