How to protect your Portfolio against Bubbles and Periods of Volatility

When it comes to investing most people are quick to give advice on how to make money. However, few people actually give tips on how to protect the money made, in more volatile times. We have met plenty of wiping out their returns during volatile times and right now with the stock market going crazy, we have compiled a list how to manage your risk in the portfolio and safeguard your returns.

Check the valuation and financial statements.

Purchasing of the share gives you proportionate ownership of the net assets in the balance sheet of the company. Especially in hard economic times you want to have companies that do have a solid balance sheet and decent amounts of cash. That cash can be used to cushion a decline in sales or to buy other businesses at cheaper prices who were not able to create a decent balance sheet.

You need to consider the intrinsic value of the shares, external market signals, and performance of the company as well.

To check the valuation one common method to do so is discounted cash flow (or DCF). The DCF considers the future expected cash flows of that business. The output of the DCF is the intrinsic value of that company. If you compare your calculated intrinsic value with the price you currently see at quoted at the exchange, you are able to make a judgement if that company is over or undervalued. The DCF is a complex mathematical model, that requires you to make some assumptions on the company and results may vary heavily on your assumptions taken. Also, it requires a lot of modelling experience if you want to do it yourself. The good news is, that we at Valuee developed a simple DCF tool that makes it super easy for you to use this approach. Check it out and let us know what you think.

Check profitability, liquidity, and gearing of a company before investing.

No measure in the world can substitute these performance metrics. That’s the true picture of the company that helps in understating performance, trends, an in-depth understanding of the business operations, and if the company got the potential to protect and grow your invested money.  Be honest to yourself when doing this assessment. Always try to think of scenarios in which things do not pan out in the way you anticipate. Doing this is a great exercise to expose areas of risk in your portfolio.

Diversify your Risks & Invest in uncorrelated assets

Diversification is a key principle of long-term investing. Your portfolio should contain shares from different industry sectors, to hedge yourself against possible industry specific problems. It’s a great safeguard if you want to balance your income and risk exposure. An excess of volatility will actually harm the growth of your investments, since you need always need higher returns to recoup your initial investments. We have created a tool, that helps you calculating your yearly portfolio volatility and understand the dynamics in-between stocks. Furthermore, we give you insights how much you can expect to lose in bad market scenarios. We are not saying you should not take any risk, just be aware on how much you can expect to lose.

Create space for cash and gold in your portfolio, because they are largely uncorrelated with other types of assets like stocks. It gives you peace of mind and intrinsic stability to your investment portfolio. The value of the gold can be a little volatile in a short span but think about the long terms and intact safety of your funds. On the other hand, having cash in your portfolio may provide you the liquidity needed if you want to start buying undervalued stocks, when the crash materialised. If the market goes down, it usually takes all companies with them, the good companies and the bad.