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One risk management strategy to help you weather a stock market storm

by , 01 July 2014

When it comes to investing, whatever market it is, there are risks. But you can't let those risks get in the way of you making money in the market. You don't need to worry about what's coming next. What's important is to have a good risk management strategy in place. So what's the best way to do that? Read on to find out…

The performance of the market over the last few years

It’s a good idea to sometimes pause for breath when it comes to your investments. You need to step back to get some perspective.

Over the last few years, the prices of shares have been rising. This shows that we’re in the midst of a bull market.

The Johannesburg Stock Market continues to hit new highs as shares continue to soar.

Have a look at the chart below showing the performance of the JSE’s All Share Index over the last five years…

Chart of JSE's All Share Index

The current bull market means that traders will mostly be going long (buying) with their trades too.

Of course, when the market continues to rise, this leads to an increasing number of people predicting a hefty pullback. Or worst case scenario, a market crash.

And it’s easy to see why there are concerns. Shares are starting to look expensive. And it’s unusual to go up for so long without some sort of correction.

For this reason, it’s important to have a good risk management strategy in place.

What risk management strategy should you use when you invest?

You can use strategies like position sizing and trailing stop losses. But one of the most effective ways to protect your wealth is by using asset allocation, Amber Lee Mason in The Crux explains.

So how can you achieve good asset allocation?

You need to spread your wealth across different asset classes, like:
  • South African equities;
  • Equities out of South Africa;
  • Real estate;
  • Bonds;
  • Precious metals; and
  • Cash.
  •  
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By spreading your wealth across different assets, you can offset poor performances in some assets with better performances in other assets.

So there you have it, one risk management strategy to help you weather a stock market storm.



One risk management strategy to help you weather a stock market storm
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