What differentiates great investors from the rest is not that they are right 100% of the time. They just try to be more right than wrong and make sure that when they are right, they make more than when they’re wrong and lose. That’s where portfolio and risk management comes in.
The key to successful investing is never to risk too much on any one company, sector, or industry. It’s important to diversify your investments so that when one or two companies fail, you can still make money because the ones that succeed will make up for the ones that don’t.
Let's imagine you've got $10,000 and want to invest in the markets. You've successfully chosen 10 great businesses to invest, allocating $1000 for each.
Two of the companies in your portfolio are Google and Nike. After your initial investment, Nike's price went 5x, meaning now Nike is worth $5000, which became almost 30% of your portfolio.
And at the same time, let's assume Google's price shrank 50%, leaving the Google allocation in your portfolio to be less than 5%. If the rule is to have the capital divided as equally as possible between all holdings, what would you do in this case?
Whale would first sell some Nike shares and take profit to balance the Nike allocation back to 10%. The second step would be to use profits to buy in some more Google at a discounted price, bringing back its allocation to 10%. By doing so, the risk per company is always within the plan at any time.
A sector is a portion of the market that can be divided based on companies with similar characteristics. There are 11 major sectors in the US stock market, such as Health Care, Information Technology, Consumer Discretionary, Consumer Staples, Energy, Financials, Industrials, Materials, Real Estate, Telecommunication Services, Utilities.
Let's imagine you've got 10 companies selected - make sure that these 10 companies also represent different sectors because stocks within a sector tend to move together. For example, if all your companies are in the Energy sector, and the sector goes down, then expect to see your entire portfolio go down, even if temporarily. Suppose you own stocks from various sectors, like technology, communications, and healthcare. In that case, you'll have a more balanced portfolio.
Defensive stocks are companies that sell a product or service that is a necessity so that the consumer would have to use it in the good times and bad times. A good example would be a company like p&g; if you think about it, even in the worst recession, people will always buy detergent, shampoo, toothpaste, etc. Products or services of defensive stocks are also usually dull, or at least not as innovative as Biotech or Artificial Intelligence, and therefore entirely predictable.
These companies also do not attract many new competitors. As a result, these companies have consistent sales and profits independent from the economic cycle.
Defensive stocks are ideal for investors who prefer lower risk with moderate returns. What is also interesting about defensive stocks is that their price tends to increase during recessions, so they are also great to have to hedge your portfolio!
Cyclical stocks are stocks of companies that sell a product or service that is a luxury or very sensitive to the economic situation. A good example would be financial stocks, car manufacturers, or Real estate companies. During a recession, people tend to not borrow money from the bank or buy a new car or house.
As a result, cyclical stocks do exceptionally well when the economy is doing well. When the economy is doing poorly, cyclical stocks tend to do poorly, so it's essential to balance your portfolio with some cyclical and defensive stocks from various sectors.
Dollar-cost averaging is a strategy that can help you reduce the impact of market volatility on your investment portfolio. If you invest this way, you divide your total investment into equal amounts and spend that money over time. This helps to even out the ups and downs of the market.
Whale helps you build and grow a profitable portfolio by taking into account all the above factors and more. So you can skip all the mumbo jumbo and just enjoy what you love to do while your wealth grows.