Principal investments get you started in the market. The challenge is deciding where to put your money and how to secure principal investments. Here are some ideas on portfolio protection strategies.
Principal Investments | Downside Protection Strategies
In This Article:
- Know Your Goals
- Compare Your Options
- Use a Stop-Loss Method
- Protect Your 401(k)
- Maximize Your Dividends
- Invest Even When the Market May Not Be Good
- Reinvest Your Returns
1. Know Your Goals
Before you select your principal investments, you want a clear goal. How much do you want to earn? What downside protection strategies make it easier to reach your goal? Should you consider principal protected investments? Are you risk averse? Do you feel comfortable with the idea of short-term losses? Would you like conservative investing? Do you have a long-term goal? A clear objective is one of your foundations in selecting and maintaining your investment options.
2. Compare Your Options
One of the common questions people ask when investing in stock market is, “If the stock market crashes, where should I put my money?”
This question is understandable. A key concern for any investor is how to protect stock profits. After all, markets can be volatile. You want to learn how to protect investments from stock market crash situations. Better yet, you want to know how to take advantage of a stock market crash.
Diversification is a common strategy for portfolio downside protection. In this process, you put your principal investments into many “baskets.” Besides stocks, you can invest in bonds and real estate. You can even put your money into a number of asset classes within an individual retirement accounts (IRAs). This way, you can grow earnings while maximizing tax advantages.
The goal of a diversified portfolio is to outperform the market. When one area of the market crashes, you will see an increase in other areas. This helps limit your risk.
Before you invest in a strategy, compare your options. Look at the advantages and downsides of the strategy. Consider your goals. Are you uncomfortable with the idea of losing your initial investment? Principal protected investments are a good choice in that situation. Do you want a higher potential for growth? A diversified portfolio is a good option. By looking at the different options, you improve the chances of reaching your goals.
3. Use a Stop-Loss Method
Using a stop-loss strategy also helps preserve your principal investments. During a good market, you make money from your investment returns. As your investment grows, you move the stop-loss. When the market crashes, it sells your investments at the stop-loss price. The downside of this is the way it sells your stock. If the market turns and starts moving up after you sell the stock, then you lose the profits.
You can also use principal protected funds to limit your downside risk. You hold principal protected mutual funds, for example, for a certain period. A part of the money goes into an investment. The rest stays in the account.
When the investment goes up, you make a profit on the amount invested. When the market crashes, you get your principal investment back. It is like a bond investment, but it has a greater potential for investment returns.
4. Protect Your 401(k)
If you are unsure about direct stock investing, then you can buy a mutual fund. An employer may limit your options in a 401(k) plan. Select your investments from the options offered by your employer.
Learning how to protect your 401(k) from economic collapse starts with finding the right funds. Professionals manage a mutual fund and make changes to it over time. They may buy or sell stocks and bonds in the fund. The fund may use diversification or other downside protection strategies.
5. Maximize Your Dividends
Consider dividend stocks for your principal investments. A dividend is an amount of money a company pays to the shareholders of a stock. The advantage of dividend stocks is the downside protection. Even during a market crash, you would still receive dividends. Stock market crashes do not always reflect the profits of the company.
As a result, the business continues paying a dividend throughout the crash. It reduces your actual losses by paying a set percentage of the company profits to the shareholder.
6. Invest Even When the Market May Not Be Good
Do you wonder where to put your money before the market crashes in 2018? How about whether you can still invest when the market is not doing well?
It’s still possible to maximize your principal investments even when the market is not in its best form. For example, you can learn what to buy during a market crash. You can ask yourself, “What goes up when the stock market crashes?”
In the end, it all goes back to your goals. Are you worried about short-term losses? Will a short-term loss throw off your financial objectives? Consider principal protected investments. You will not lose your initial investment, and you have room to grow.
Are you focused on a long-term goal? Will a low-risk investment harm your long-term goals? Consider a mutual fund portfolio. You can also consider a portfolio of stable companies that offer dividends. Short-term goals and long-term goals impact your investment decisions. A market crash does not prevent you from reaching your long-term goals. It can impact your short-term goals. You want to find a balance that considers your long-term and short-term goals.
Keep in mind, though, your investment account impacts your options. A 401(k) account does not always offer principal protected investments. Your employer decides on the investment options in your account. Plan for potential limitations. Set up a backup plan in case your first choice for an investment is not available.
7. Reinvest Your Returns
Principal investments can grow, which means you create returns. One of the smartest things you can do is to reinvest them.
Set your account to reinvest your dividends. You can also allow the amount to build up and manually reinvest the dividends. Manual reinvesting works well when you must pay a transaction fee. Otherwise, choose automatic reinvestment.
By reinvesting your returns and dividend income, you compound your returns. This means you increase the amount you earn over a long period. If you reinvest a 10 percent return, then the next year you make extra money on that 10 percent as well as your initial investment.
The best strategy for your principal investments depends on your goals. You have different options to reach your short-term and long-term objectives. The key is evaluating your tolerance for risk. Focus on a strategy that helps you stay on track. It should be one that can give you peace of mind even when the market crashes.
What are your strategies for protecting your principal investments? Tell us your tips in the comments section below.