Risks In The Stock Market
As previously established, the stock market has risks. This led to one of the most common and followed investing advice: buy low, sell high. So how do you buy low and sell high. You can take a look at my previous post to see more on how to do that (hint don’t try too hard).
Ok, let me make one thing perfectly clear. If you can accurately tell when something in the stock market will go up or down, there is no reason you should not be a billionaire. You can even borrow at the margin, advice I am against. No one can accurately predict the stock market or anything in it.
I was given advice on how to invest in the stock market. It is simple, much like the retirement fund, you should try to ride it out. You should not respond instantly to loses and gains. However, to minimize risk during times when the value is high, you can sell a fraction of it. Then the money can be put in your pocket. I have another idea based off this called reallocation. Reallocation a method of managing risks in the stock market by moving assets to different classes including stocks, bonds, and cash alternatives.
Managing Risks In The Stock Market With Reallocation
Reallocation requires at least two assets. One of these assets should be a lower risk asset. The gains and losses of the stock market should have a lesser effect on this asset. The other assets requires for this setup are your higher risk assets. I recommend using individual stocks if you want to try to obtain some gains in the stock market outside of funds that try to follow the market. If you still feel like using mutual funds make sure it has higher chance of gains.
How My Way Of Using Reallocation Works
As previously mentioned, I prefer large cap stocks with dividends, preferably a high one. The idea of my setup is to assess the recent gains and losses from your higher risk investment. When the stocks in the high risk assets have consistent gains over long periods of time, the dividends of the stocks should be reinvested into the low risk asset. If any of the high risk assets are appearing to be overvalued after a long period, you may even sell some or all of it to reinvest, or keep as cash. Do note, a capital gains tax will be applied if you sell it for cash. The low risk asset can act as storage to keep the money growing and safe.
How To Maintain Your Portfolio
I still recommend regular investments for your index fund. However, there are fees to purchasing these stocks which can negate some of the gains. For instance, I use Fidelity Investments for individual stocks, they charge a $4.95 commission fee for each trade. If you are just starting out, the amount you invest in individual stocks should easily be less than the amount you invest in your mutual funds. Therefore, less regular and larger investments in stocks you trust may be better. If you cannot find a good stock at the time you could still invest in your retirement fund or other investments and wait for a good stock.
Some stocks will go down. Look at this as a opportunity to invest more into it. You should spend some money in your low risk fund while reinvesting your dividends on your high risk investments. This will help insure that the you maximize your gains. However, pay attention to the company news, last thing you want is to own stocks in a company that is closing down.
Reallocation not only allows your money to grow in the stock market, but the low risk fund can act as a short-term investment. Short-term investments can be used to save to buy a large purchase. By choosing the right low-risk asset, the investment will not only beat inflation, but give you some returns (not as much as common indexes though). Managing the risks of your assets will pave the path to forging your wealth.