3 Ways To Preserve Capital While Investing
“Never lose money.” These words by Warren Buffet are arguably one of the best pieces of advice an investor could follow.
Although investing is a risky affair, it pays to be sensible and careful. You should not approach investment with the attitude that you can win or lose. A smart investor will secure their capital first and then work on making a profit. This is a conservative investment strategy known as capital preservation.
Here are three ways to preserve capital and prevent loss in your portfolio.
1. Diversify Your Portfolio With Bonds
One of the easiest tricks to protect your capital is to diversify your portfolio. Invest in more than one asset class, and you will reduce unsystematic risk. Unsystematic risk, also known as specific risk, is the risk associated with a specific industry or security.
Bonds are an excellent way to diversify your portfolio. They have a low correlation to other asset classes, which provides an excellent way to reduce its volatility.
Bonds are also fixed-income instruments with a maturity date. The principal is paid back in full plus the interest earned. This keeps your capital protected. Government bonds, treasuries, and investment investment-grade corporate bonds come with the lowest risk.
2. Make Use of Stop Loss Orders
Share prices are always changing, and it is unreasonable to expect that you will exit all trades with a profit. But you can use a stop loss to control how much you lose without having to monitor your portfolio constantly.
A stop loss is an order placed with a broker to protect your capital against falling share prices. It refers to a preset amount of risk that you are willing to take, reducing your exposure during a trade. When the prices get to the predetermined amount, the broker automatically sells the stock.
You get the assurance that you cannot lose beyond the amount you are comfortable with. For instance, if you purchase the stock at $10 and set a stop loss order of 10% below the buying price, your shares will be automatically sold at the current market price if the share prices fall below $9.
3. Find Stocks That Pay Dividends
Any successful investor will tell you that investing in the best stocks requires extensive research about the company and understanding its history. You can only get good returns from your stocks if you invest in stable companies paying dividends. Go for Dividend Aristocrats. These are companies that have increased their dividends consecutively for over 25 years.
As long as a company is paying dividends, it is likely to grow fast and result in an increase in the share prices and high capital gains. The dividends will also represent a large portion of total returns, and you will generate the capital gains faster.
Dividend-paying stocks will increase the overall return of your portfolio. The dividends will also cushion you from falling stock prices.
Whether you are risk-averse or risk-tolerant, you should always invest while keeping the loss in value of your capital at zero or minimum. You can achieve this with a diverse portfolio that includes high-quality bonds and dividend-paying stocks. Make use of techniques that can prevent losses, such as stop loss orders.