Making money is very easy in the stock market but hard to secure profit. Most of the time a human’s decision-making process in investment is driven by greed rather than quantitative reasoning which eventually prevents investors from securing their profits. Investors should begin with a diversified portfolio and strictly adhere to profit-taking and selling rules. The selected Stocks should be uncorrelated that even if one type of stock may fall in a bear market, another type of stock would raise.
A Well diversified portfolio usually hedges the volatility of the stock market. The investment return might be less in an inevitable swing of the stock market for the diverse portfolios but none of the single stock would be dominant over the whole portfolio (Bernard, 2020, p. 1). In the volatile stock market, a well-diversified portfolio is one of the main keys to dealing with risk.
ETFs are better than mutual funds for trading because of their accessibility and tax efficiency. According to Pareto, C. (2022, January 5), “A major difference between the ETFs and mutual funds is that ETFs can be traded intraday like stocks, while mutual funds only can be purchased at the end of each trading day based on a calculated price known as the net asset value”.
According to Romano, M. (2019), “The iShares Core High Dividend ETF (HDV) and Vanguard High Dividend Yield ETF (VYM) are diversified across sectors, with companies that have a history of raising dividends” (Romano, 2019). There are 4 signs to sell an ETF, a new strategy that isn’t a good fit, higher fees without better returns, performance that doesn’t match the benchmarks, and a lack of liquidity. If these signs are visible in an ETF, the investor could sell it.
A well-diversified portfolio includes stocks that are uncorrelated because correlated stocks go down in a bear market together. At the time of researching stocks, investors need to identify the potential products and narrow them by finding the best company in the market for the specific product. According to Dorfman, J. (2021), “The blessed septets are Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Meta Platforms (FB), Microsoft (MSFT), Netflix (NFLX), and Tesla (TSLA)” (Dorfman, 2021). They are the leading stocks in their own sectors.
Since the intention of investment is to make profits, investors should sell their holdings after a certain percentage of gain or loss. According to O’Neil, W. J. (2004), “you should consider selling a few of your stocks when they are up 20 to 25 percent from your purchase price and cutting every single loss at no more than 7 or 8 percent” (O’Neil, W. J. 2004). According to Investor’s Business Daily, a stock should behold 8 weeks if it reaches about 20 percent gain within 3 weeks (Investor’s Business Daily, 2022). After that, there is a big chance of swinging a stock to go down or rise even higher. If an investor follows these instructions, only one right decision among four will make ultimate profits.
As the stock market is very volatile, the value of stocks fluctuates every day. According to Beers “Most investment professionals agree that although diversification is no guarantee against loss, it is a prudent strategy to adopt towards long-range financial objectives (Beers, 2021)”. The investor has to take time and understand the market as well as the stock.
To get high returns the investor must assume high risks and wait for the perfect moment. According to research done by Beers, a fundamental analyst, “the key to diversification is that it helps reduce price volatility and risk, which can be achieved by owning as few as 20 stocks” (Beers, 2021). So, investors should invest according to their ability to manage. Cryptocurrency could be a part of a diversified portfolio, but the percentage should be less than five percent compared to stocks, bonds, mutual funds, ETFs, or gold. If the investor wants to save assets for the future, he could transfer some of his assets into gold.
A Well-diversified portfolio is a key to hedging the volatility of the stock market. Every investor should keep a selling plant to secure their profit. 3 to 1 selling plan is a good way to secure capital gain. Investors should not wait to sell a stock after falling 7 to 8 percent value. Though diversified portfolios do not always return high capital gain, it helps to hedge volatility in the stocks and secure capital gains by selling them after a certain point. So, investors should diversify their portfolios and keep some selling rules.