Stocks are assets subject to high volatility. In 2021, for example, these assets registered a great appreciation. 2022 is already being negative for shares, with the main indices accumulating drops of more than 20% since the beginning of the year.
In this article, we give you some tips to reduce losses and increase gains in this type of investment, which should always be in line with your risk profile🇧🇷 That is, if you decide to invest in stocks, think about what maximum loss you would be willing to takeas well as the amount you feel comfortable investing in stocks.
Invest capital you don’t need in the short term
The available capital is a very important variable to define the values of your investment in stocks. Only invest in stocks when you have your emergency fund set up.
This point is very important, since investing in shares involves the risk of losing capital. That is, if you invest in stocks, and a few months later you need that moneyyou run the risk of having to close positions with heavy losses, if there is a period of decline in the markets.
Imagine, for example, that you decided to invest in the stock market at the beginning of 2022, with money that you would need during the year. In this case, the most likely thing was to have lost a large part of your capital due to not having guaranteed liquidity to cover unforeseen expenses.
Investing in long-term stocks has shown very interesting returns, so to have less risk in this investment and boost your gains, you must have a extended investment time horizon🇧🇷 Take as reference the 10 year period when investing in stocks.
As mentioned above, the stock market is highly volatile, which may imply losses in the value of your investment in the short term. Thus, it is very important not to panic at these times. Market declines can also be seen as a good opportunity to reinforce positions at lower pricesand not as a time to sell all positions at a loss.
In short, it is important to remain calm and focus on the long term, and not be affected by rumors, speculation and short-term movements.
At that level, the year 2022 has been a huge test of investors’ patience.
diversify the portfolio
Another key to success in the stock market is to diversify your portfolio. Does this mean that you shouldn’t put all your eggs in one basket: it is important to build a portfolio with several stocks, from different sectors, typologies and geographies.
On this point, be aware, however, that if you do not have the time and/or knowledge to invest in individual shares, alternatively might consider investing in ETFswhere you can have a high degree of diversification, with little work and lower costs.
Know that the future is not always the same as the past
This is another of the maxims that you should keep in mind. Many times, the tendency of investors is to look at the historical chart of a stock and, from there, try to draw conclusions about its future evolution. However, good past profitability does not guarantee the same performance in the future.🇧🇷 On the contrary, in certain cases, great performances in the past can mean less potential for long-term upside.
In summary, the past should be taken into account only as a reference, and not as a clear prediction of what will happen in the future.
Use o dollar-cost averaging
O dollar-cost averaging it is a strategy used by investors to build their positions. Instead of investing in a particular stock or ETF all at once, distributes this investment over several moments.
The fact of spreading the investment over several periods makes it possible to take advantage of moments of decline in a given stock.
To demonstrate the importance that the dollar-cost averaging may have, especially in times of downturn in the market, consider the example below.
- 1,000 euros of total investment in share X spread over five different moments. 200 euros are invested in each of them.
By investing according to the above schedule, means that you purchased 275 shares for a total of 1,000 euros, i.e. you bought the shares at an average price of 3.64 euros. If, for example, the current share price was 3.5 euros, it means that you would be losing 37.5 euros with the investment.
By contrast, if he had not followed the rule of dollar cost averaging and had invested all of the 1,000 euros at the initial moment (October 1, 2021), it means that he would have acquired only 200 shares in the company. In this case, at the current exchange rate, your 200 shares would be worth just 700 euros, which would represent a loss of 300 euros, a lot higher than the case in which the dollar cost averaging.
In summary, this strategy turns out to be useful, in the sense of seeing market declines as an opportunity to strengthen positions, thus increasing the potential for gains in the long term.
However, this type of strategy can also have disadvantages such as higher costs in terms of commissionssince you have to give several market orders, namely buy.
Invest in knowledge first
Investing in the stock market naturally presents complexities. However, knowledge is undoubtedly a great tool to succeed in this market.
Therefore, all your investment decisions must be supported by a lot of research.🇧🇷 That is, in the case of individual actions, you must clearly know the following aspects:
- The company’s sources of revenue, i.e. its business;
- The current risks of the sector and the company in particular, which are usually identified in its quarterly reports of accounts;
- Your financial situation and the profitability of your activity;
- The value of some fundamental analysis indicators, such as Price/Earnings per share, among others.
Stay tuned for current economic news
If you want to be a successful investor, you must be aware of the world’s economic reality on a daily basis. Events such as the release of economic growth rates, unemployment rates, decisions on interest rates, among others, have a relevant impact on the financial markets, so it is important to pay attention to these developments, in order to anticipate possible movements in the market.
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