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The stock market has been dropping below recent support levels, giving stock market investors reason to be on guard. All investors want to know how to make sure their money is safe. There are numerous ways to protect your investment capital against market risk, which is one of the most common types of risk. Due to the increase in stock market volatility recently, I am doing a series of risk management videos on the 9 different types of risk, and ways to limit each type. The videos will be added to my youtube channel over the next couple of weeks, at http://www.youtube.com/user/financialwomantv.
One of the most common and simplest ways to limit risk is to simply use “stop losses”. If you invest your own money in individual securities or mutual funds, you can choose to sell your holdings when the price drops to a certain level. This can sometimes be done automatically, depending on the investment type. If you work with a financial advisor, you can discuss limiting your losses with her, and see which strategies she prefers. The main thing is that you pay attention to your investments, and have a way to limit your risk. This is known as “risk management” in investing lingo.
Technical analysis, which uses charts to help investors (and traders) make pricing decisions, allows an investor to see obvious areas of support based on previous pricing levels. The investor can then put a stop loss order in at a price just below the level of previous support. This technique is much simpler than it may sound.
Now is a good time to check the risk management of your portfolio. Advocates of even minimal levels of market timing suggest getting out of the market when it breaks below previous support levels. You are then able to re-enter the market once it has bottomed and re-established an uptrend, with most of your investment capital intact. While this may trigger taxable gains in some accounts, and even cause you to miss some capital appreciation between selling and repurchasing, it can also protect you from those occasional devastating losses that truly throw your financial plans off track. All financial women know how to protect investment capital.