Protecting your portfolio

Investments can rip high returns, and may also rip high losses. I started investing with a mindset of buying low and selling high, which sometimes can lead to high losses in the stock market.

The thought of buying low and selling high often traps investors, including myself into a value trap. A value trap means that the stock can be on a downtrend but the investor keeps holding the stock thinking that it will go up eventually after a crisis. But if the stock do not go up, the investor will risk better returns elsewhere because the current stock bought at an overvalued price did not get sold away.

Do not fall into a value trap while preparing for a crisis

While thinking of what to sell in your portfolio to prepare for a crisis, what have gone down in value cannot be ignored. Instead of thinking of the losses due to the sale, think of how much lower the stock will go in the event of a crisis. By changing the way you think, you can avoid more losses than what you have already incurred.

Protecting your portfolio

By having a diversified portfolio of stocks, you mitigate your risk of a single sector downfall and keeps your portfolio balanced. For example, in a diversified portfolio, you may see stocks spreading across a few sectors like 'services, finance, transport'. A financial crisis would likely bring the prices of stocks in the finance sector on a downtrend while the services and transport sectors helps to keep the portfolio buoyant.