Most of the world’s richest people are prolific stock traders. From Warren Buffet to George Soros to Bruce Kovner, the list is endless.
We all look up to these billionaires in admiration, hoping to acquire just a slice of their portfolio, even if that takes a lifetime.
Yet, most stock traders didn’t miraculously get to the top. Their journeys were fraught with numerous pitfalls, and many had to weather major financial storms to break big.
One common takeaway lesson from stock investors is that wealth creation isn’t enough. After acquiring millions through stock trading, it’s imperative to guard your wealth from the industry’s high volatility.
We’ve rounded up the seven key principles for cushioning your wealth in stock trading.
1. Operate Within a Predetermined Ceiling
Working within a confined budget is one of the best strategies for protecting your wealth in the stock market. But how do you determine your investment ceiling in the first place?
Well, there are two fundamental rules.
First, only invest what you can afford to lose. That could be as low as $100 for newbies or over $100 million for seasoned investors.
More importantly, purchase stocks based on the price of individual shares. Simply having an ‘n’ number of shares doesn’t determine your portfolio’s strength. Rather, it’s the value of each share that counts.
After setting an investment ceiling, it doesn’t matter if that translates to a single share or millions of units.
2. Diversify Your Portfolio
Portfolio diversification isn’t just a golden wealth creation tip. For stock traders, it’s also an invaluable wealth protection strategy.
One way to diversify your portfolio is to invest in multiple classes of similar stocks.
For instance, Berkshire Hathaway is presently the world’s most valuable stock. Instead of purchasing multiple Class A shares, which start from around $703,000, you could spread your investment to the company’s Class B shares, which average $460/unit.
Besides, you may diversify into non-correlated assets, such as real estate, healthcare, and agribusiness.
Non-correlated assets are typically unaffected by similar market dynamics. So, your investments remain largely secure during a downturn in some industries.
3. Prioritize Humans and Robo-advisors Over Self-Managed Portfolios
Self-managing your stock investment portfolio may sound enticing at first glance. After all, it’s cheaper and confers full control of all trading decisions.
But unless you’re a seasoned trader, it’s better to enlist the assistance of professional stockbrokers.
For a reasonable fee, you can have the experts handle all the legwork as you go about your routines.
If you’re wary of the often-inhibitive fees some stockbrokers charge, you may consider a robo-advisor. These programs utilize artificial intelligence (AI) systems to monitor and rebalance your portfolio based on your short- and long-term investment goals.
Using stock trading programs is also another way to stay ahead of your competition.
4. Implement Stop-loss Orders
Tracking a volatile stock market is both time-intensive and emotionally stressful. But that’s where stop-loss orders come in.
A stop-loss order is a risk management tool with instructions to buy or sell a security once you hit or exceed a predetermined target.
Stop-loss orders can assume multiple forms. The most popular types are hard stops, which automatically sell your stocks at a fixed price if the price drops to that amount.
Let’s say you purchased a stock for $10/share and set a hard stop at $9.50. In that case, your stocks will be sold at $9.50 whenever the price drops to $9.5.
5. Consider Long-term Investments
Most stocks take years to realize significant returns on investment (ROI).
If you’re a risk-tolerant trader, you might consider holding your investments for the long term despite the market’s dramatic fluctuations.
Many investors reckon that stock market investments can generate 10% annual returns over several decades.
Take the case of Amazon, for instance. Those who purchased the company’s shares at the closing price on the day of its initial public offering (IPO) and held onto their investments are roughly worth $1.87 million today.
6. Experiment with Swing Trading
Locking up investments for decades isn’t everyone’s forte. If you’re risk-averse, short-term trading strategies like swing trading would be a more effective way to protect your wealth.
Swing trading is all about capitalizing on both sides of the pendulum.
With this approach, you can purchase shares when you anticipate significant upward price movements or sell them when you predict price dips.
However, swing trading isn’t for the fainthearted. It requires extensive analysis of both support and resistance, which often calls for continuous market monitoring.
7. Don’t Forget Your Taxes
Paying taxes is a civic duty, right? Well, that glorious sentiment only makes sense when you’re remitting your fair share of taxes to the Internal Revenue Service (IRS).
Unfortunately, the tax regime is naturally skewed in favor of the taxman. Therefore, you must devise ingenious tips to minimize your tax obligations.
One such intervention is maintaining tax-efficient trading accounts. Experts recommend blending taxable accounts like individual retirement accounts (IRAs) and 401(k)s with tax-advantaged ones like Roth IRAs and Roth 401(k)s. The former provides unhindered access to your investment funds, while the latter allows you to grow your investments tax-free.
Wrap Up
Stock trading is highly volatile, and once-profitable investments can turn into crippling losses overnight. Fortunately, you can implement these pointers to safeguard your wealth.
As a parting shot, remember to seek expert investing advice rather than wade into stock trading headlong. Better yet, enlist the services of professional stock traders to help you take baby steps in this lucrative yet unpredictable industry.
Article and permission to publish here provided by Jessica Smith. Originally written for Supply Chain Game Changer and published on November 27, 2024.
Cover image by Sergei Tokmakov, Esq. https://Terms.Law from Pixabay.