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Every successful investor uses Investment Strategies as an essential way to preserve their portfolio while maximising their return on investment. In this context, we look at nine portfolio techniques. Each of them has distinct advantages, but they also have drawbacks, which are discussed in this article.
Like other investors, you want to preserve your capital while making the most of it. There are various methods to accomplish this, with investment ideas to fit every sort of person. It all comes down to determining the portfolio protection strategy that best suits your view and risk tolerance.
To make an informed decision, consider the issues involved as well as the need of portfolio diversity. The more risk adverse you are, the more severe you want to be with risk management.
In this post, we’ll look at nine alternative portfolio techniques that you might be interested in. Each has distinct advantages that are worth considering, but many also have drawbacks that you should thoroughly research before making any investment decision.
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9 Investment Strategies to Protect Your Portfolio
Investment Strategies to Protect Your Portfolio
The first stage is to make sound decisions that will put you at ease in both bull and bear markets, where values are rising or falling.
This means that you must first understand your own risk profile before determining whether portfolio strategies are appropriate for you. As an example, suppose you own stocks and the market falls.
If you are risk averse, you may choose to sell in this case to minimise your possible losses. Nevertheless, this makes the losses permanent, as you no longer have the potential to make money back if the market fights back.
A less risk-averse investor may elect to remain patient and try to recoup their losses when the market returns, despite the possibility of further losses if the market continues to decline, so you’ll want to be confident that your investment will recover, as well as have the financial security to wait.
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Portfolio Investment Strategies to Consider
Another strategy to prepare for market ups and downs is to not invest money that you cannot afford to lose. This may make you feel more at ease while you wait for the proper time to make a decision.
You’re more prone to panic or feel pushed to make a decision if you invest money you can’t live without.
Another critical stage in analysing portfolio strategies is determining the appropriate time horizon for your investments. This manner, you avoid investing funds that you may need to withdraw fast, and you can select the appropriate time term for your investments.
Again, this provides you the confidence to overcome any roadblocks and avoid being paid at the incorrect time.
When deciding how much to invest and what type of asset to buy, you should consider your risk tolerance. You will protect your money by lowering the risk of making the wrong decision.
Portfolio diversification can also help you get your investments started to a solid start.
Stocks, bonds, and other uncorrelated assets, such as real estate, can all be included in various portfolio investing methods.
You can use Modern Portfolio Theory to account for all of these factors (MPT). It is a style of investing that tries to maximise prospective return while keeping risk to an acceptable level by diversity across asset classes.
Another option to examine is the core-satellite investment plan. In this situation, the ultimate goal is to keep costs and volatility low while outperforming the market as a whole. This is accomplished through a more clear division of the assets. Let us now examine these two portfolio techniques.
Investors can use a variety of strategies to reduce risk. The risk score of their portfolio is visible to all eToro users.
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Portfolio Theory in the Modern Era (MPT)
Investors have differing perspectives on the subject of portfolio diversity. For example, Warren Buffett has held 40% of his portfolio in a single stock at times, although other experts believe that a higher level of diversification is required for success. Which of these approaches is correct?
We should begin by confirming that the goal of diversification is not simply to maximise returns. The modern approach to portfolio theory is to keep risk at a manageable level while maximising possible profits.
This may lead you to step outside of your comfort zone by selecting asset classes that you are unfamiliar with but can explore to better comprehend.
Building a portfolio of domestic equities, international stocks, bonds, and real estate funds is an example of diversification. Because of this diversity of investments, there is less danger of being impacted by a single market slump.
Even if your home country’s stock market falls dramatically, you have other investments that should be unaffected. As a result, most investors would benefit from diversifying in this manner.
Yet, Warren Buffett is hardly the only well-known investor who favours a less diverse portfolio. Other financial experts, including George Soros and Bernard Baruch, have indicated that a more targeted strategy could be advantageous.
Diversification, according to Buffett, only makes sense for those who don’t know what they’re doing, whereas Baruch highlights the time and work required to keep track of a diverse variety of investments. Yet, these top investors have more information than the majority of us and have distinct objectives.
Diversification is recommended for most people who invest in the markets. You don’t want to put all of your available assets into a certain investment until you’re completely certain it’s risk-free, do you?
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The Core-Satellite Strategy
While the MPT theory is ideally suited to a wide spectrum of investors, the core-satellite strategy can be used to investigate another logical investing method. This enables you to divide the total amount to be invested into two categories.
In this situation, allocate 70% of the total investment to safer investments. The remaining 30% is designated as a satellite investment and includes a higher risk element that could lead to better returns.
The notion is that the core component continues to benefit even if the riskier satellite venture loses money. This method of investing is outlined in further depth in this eToro article.
If you choose a core element such as eToro exchange-traded funds (ETFs), real estate funds, or fixed-yield assets such as bonds, the core-satellite method of investing may be a viable option.
All of these are on the lower end of the risk scale. Stocks, cryptocurrency, or commodities could be used as satellite investments because they have a better potential of profiting but are also regarded riskier.
Investors have differing perspectives on the subject of portfolio diversity.
Invest in Correlated Assets to Diversify Your Portfolio
The two strategies discussed above address portfolio diversification in distinct ways. Regardless of which option you choose, investing in a different asset class to diversify your risk is smart advise for everybody.
Even if you opt to focus primarily on one market, such as equities, you must understand how diversity affects portfolio risk. For example, rather than sticking to one region, you should probably invest in stocks from several companies and industries.
In a diverse portfolio, you can expect to see some assets rise, some fall, and some remain relatively steady.
A concentrated portfolio, on the other hand, introduces unsystematic or specific risk. This is a danger that is exclusive to a certain company or industry rather than the entire market.
Part of the importance of portfolio diversity is that it keeps unsystematic risk as low as feasible. Instead, you face systematic risk, which is the risk of generally unfavourable investment conditions that everyone faces when making any form of investment.
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How does a well-diversified portfolio appear?
While each investor will have a different opinion on portfolio diversification percentages and strategies, a well-diversified portfolio may include up to 30 stocks to help decrease risk. This is despite previous conventional knowledge claiming that ten equities would provide for adequate diversification.
While the MPT theory is ideally suited to a wide spectrum of investors, the core-satellite strategy can be used to investigate another logical investing method.
According to studies, even having 60 equities provides just around 90% of the benefits of genuine portfolio diversity. As a result, rather than stressing over specific figures, the most crucial element to examine is why you’re diversifying in the first place.
The diversification benefit of a portfolio consisting of two stocks rather than one is clear. If you subsequently add more companies from different industries, the benefits will continue to accrue, assuming you choose well. This is a method of protecting a stock portfolio from market fluctuations.
Consequently, this implies that your earnings will be divided into several categories. As a result, if you simply invested a portion of your money in technology companies, you would only obtain a portion of the gains you could have gained if you had invested all of your money in this area.
It comes down to how comfortable you are with the thought of investing in one or a few areas and being at the mercy of their results.
With eToro, you can experiment with several asset classes or use the CopyTrader option to follow skilled traders in the fields of your choice. Another alternative is to look into ETFs or other products that are already diversified by combining diverse equities, geographies, and industries.
Making use of a stop loss with associated assets
What exactly is a stop loss and how can it be used to safeguard your portfolio? A stop loss order is used to help you sell shares or other assets quickly and automatically once they reach a particular price.
This strategy lowers risk by ensuring that assets are sold if their value begins to decline and you no longer feel comfortable owning them. When investing in linked assets, such as multiple equities in the same industry, using stop loss orders to mitigate risk is a particularly helpful strategy.
They automatically stop your investment when it reaches a particular level, which could be critical if the industry in which you’ve invested collapses dramatically in the near future.
The distinctions between hard and trailing stops
You will come across two types of stop loss mechanisms, both of which are important to understand. The first is known as a hard halt and is the most straightforward. If you hold a block of shares, you should consider setting a stop loss limit of, say, £10.
This is a type of standing order that instructs the shares to be sold automatically if their value falls below £10.
A trailing stop is the other type. What is a trailing stop loss and what makes it unique? In this scenario, it’s a more complicated mechanism that sells the stock if its price moves by the percentage you specify from its present price.
As a result, you can set a 10% limit, which implies you will sell the asset if it moves that far. If the shares are currently worth £10, you would sell them if they dropped to £9.
If you decide to employ the stop loss method, you need think about it carefully. Note that selling shares in this manner results in a permanent loss, even if the market recovers fast. Still, it’s a great loss-limiting approach that most investors may employ.
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This eToro guide will show you how to set your stop loss limit on any trade in a few easy steps. You can also learn how to employ a stop loss technique efficiently and professionally.
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Dividends Serve as a Safety Net
How can you reduce the risk associated with your stock market investments? Instead of relying exclusively on the stock’s rising value, another prudent choice is to hunt for dependable stock dividends to help you make a profit. This can also help to mitigate the damage if the share price decreases.
Dividends are often paid on the stock of stable, profitable corporations with a proven track record. As you get monthly payments, you build up a cushion on the stock’s value, lowering your risk of losing money if the price decreases.
If you’re wondering how to protect stock profits from market pressures, consider this simple method: Choose dividend-paying equities, and the necessary amount will be credited to your eToro account.
The only exception is if you are short, in which case your account will be charged. Dividend investing is purchasing additional shares with the cash received in dividends.
A trailing stop loss places the order a specified number of pips above or below the market price, depending on whether the position is a BUY or a SELL.
Reduce Risk by Using Put Options, LEAPS & Index LEAPS
You may be familiar with the put option strategy or the usage of LEAPS to reduce investment risk. They are viable choices, but what do they imply and how can they be implemented effectively?
Put options will be clarified here, as will the definition of long-term equity anticipation securities (LEAPS).
Put Options
What exactly is a put option? This is another way to protect your investment and can be handy if you don’t want to sell an asset but believe its value will collapse at some point.
A put option allows you to sell the stock in the near term at a predetermined price and date. This is easier to grasp if we consider an example. Assume you choose a put option to sell your 100 shares worth £60 within a month.
When the choice date arrives, the value reduces to £40. In this situation, you may sell the shares for a higher price than the current market value.
A call option, on the other hand, allows you to acquire shares at a specific price on a specific date.
LEAPS
Long-term equity anticipation securities are referred to as LEAPS. These are longer-term options than call or put options, which frequently last more than a year, but otherwise are very comparable to a long-term call or put option.
Long-term equity anticipation securities (LEAPS) are commonly employed in hedging strategies since they allow you the right, but not the responsibility, to buy or sell a stock.
Index LEAPS
When we look at index LEAPS, we can see that they are comparable to the prior method. They do, however, cover an entire index rather than a single stock.
A common technique involves selecting an index LEAPS option that is tied to each fund or company held, with the goal of long-term hedging of the portfolio.
When investing in linked assets, such as multiple equities in the same industry, using stop loss orders to mitigate risk is a particularly helpful strategy.
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Purchase Principal-Protected Notes (PPNs)
Is it a smart idea to invest in principal protected notes to reduce risk in your portfolio? This is a sort of fixed income security that guarantees you at least the amount you deposited (or a set percentage for non-principal protected notes).
This guarantee is dependent on the corporation that issues or guarantees it, therefore choose one that is covered by the principle protected notes (PPNs) legislation.
The premise is that you will recover your money regardless of what happens. If the stock’s value falls, you will receive the original amount upon maturity. If the value rises, you will receive the initial amount plus a percentage of the earnings.
Of course, this differs from a traditional stock investment in that the amount you receive is totally dependent on market fluctuations. We may take a look at an example of protected senior notes to understand how this might be appropriate for a risk-averse investor.
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These safe stock investments guarantee your initial investment; for example, if you invest £10,000 in shares and the price decreases, you will always get your money back. You will receive a percentage of the increase in the case of share appreciation.
The guaranteed percentage on non-principal protected notes is less than 100%. Assume you invest £10,000 and are 75% covered. This implies you will be paid £7,500 at maturity.
If the price rises, you will receive your original £10,000 plus a portion of the profits. This is a strategy that allows you to gain exposure to the stock market while earning more than a fixed income investment.
Yet, the protected element assures that the level of risk is lower than if you purchased shares of a company directly.
Pros and Cons of Principal Protected Notes (PPNs)
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Diversify Your Portfolio Using Non-Correlated Items
Investing exclusively in different stocks exposes you to systematic risk because your investment is dependent on only one asset class. As a result, a well-designed portfolio should enable you to invest in uncorrelated asset groups.
What exactly do we mean when we say “uncorrelated assets”? These are assets that do not move in tandem with the other assets in your portfolio. Having said that, it’s important to remember that there are different degrees of association to be mindful of.
Stocks and bonds, for example, are considered different asset classes, yet the same market dynamics can move them both at times. The best uncorrelated assets are those that are negatively linked, meaning that when one rises, the other falls.
Stocks
Equities are a good place to start when seeking for uncorrelated assets. As one of the most popular investment types, you may elect to use it as your primary asset and then consider how to protect it with other investment types.
Because of the potential volatility of stocks, you may want to consider going with something more reliable as an alternative.
Property investment trusts (REITs)
The lack of correlation with other major asset classes is one of the primary advantages of investing in real estate funds. These property funds are often traded on major stock exchanges.
Gold
At times of economic upheaval or instability, gold has long been regarded as a form of safe haven. This means that it can be used in tandem with equities, as gold can gain when stock prices decrease.
Cryptoassets
This type of investing can be employed as an uncorrelated asset with many other asset classes. Because of the relatively high level of volatility, you may want to consider investing in cryptocurrency alongside something less volatile.
When it comes to protecting your investments, this eToro article explains all you need to know about investing in cryptocurrency, taking a look at variables like volatility, scarcity, and security.
Wine
Wine tends to appreciate in value over time, making it an appealing investment when you wish to diversify away from other asset classes. In many circumstances, the bottles do not even need to be physically stored.
Because wine is less volatile than equities, it can be utilised to diversify your portfolio without raising risk.
Art
Art is another option for diversifying your investing portfolio. It is unrelated to other asset classes, and art tends to keep its value well during periods of high inflation or market instability.
Whichever option you choose, try to keep all of your investments in mind for a well-balanced portfolio. The following assets are appropriate for each of the strategies outlined above:
| Strategy | Suitable Assets |
| Modern portfolio theory (MPT) | Stocks, ETFs, bonds, real estate funds |
| Core-satellite approach | Stocks, ETFs, bonds, real estate funds, cryptoassets, commodities |
| Correlated assets | Stocks, ETFs, cryptoassets, commodities |
| Dividends | Stocks, ETFs, real estate funds |
| Put options | Stocks |
| LEAPS | Stocks |
| Index LEAPS | Indexes |
| Non-correlated assets | Stocks, real estate funds, gold, cryptoassets, wine, art |
| Principal protected notes (PPNs) | Stocks |
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Conclusion to Investment Strategies to Protect Your Portfolio
All of the portfolio methods discussed here provide alternative options for you to invest while maintaining risk at an appropriate level for your personality, risk tolerance, and financial goals.
By studying concepts such as modern portfolio theory (MPT) and portfolio diversification with correlated or non-correlated assets, you can create an investment strategy that fits you precisely and allows you to proceed confidently.
Why is it important to consider correlation when investing?
Its significance stems from the fact that many investors want diversification, which works best when assets are uncorrelated or negatively correlated with one another, so that while certain sections of the portfolio decline, others gain. Correlation information can assist you in lowering the risk of your investments. A highly linked portfolio is considered riskier, whilst a lower correlated portfolio is considered safer.
How does eToro assist investors in risk management?
Risk management is an essential ability for both long-term investors and more aggressive traders. eToro assigns a risk score to each investor, which helps you understand the risk of your own investments as well as the risk of any trader you want to replicate using our CopyTrader function.
Based on my risk tolerance, what automated tools can I use?
We provide numerous options for investors to regulate their risk tolerance, whether they are more risk-prone or risk-averse. Stop Loss and Take Profit orders, for example, will be automatically triggered at the price levels you choose.
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