When it comes to investing, the one thing that deters many from getting started is the fear of losing money. We often read articles on how certain people (Mr XX) who have made a tremendous return overnight through their handpicked stock. Less focus is placed on the stock that slumped which make sense since nobody goes around bragging their losses.
This creates a number of problems. The one problem we see is that it creates an illusion that if the stock you bought is going in a downtrend then you quit since all the articles you have read-only showcased their winnings. This often lures us thinking that investing is either a Win Or Lose scenario. But the reality is, investing is a journey.
Often time, it involves a lot of emotional and physiological strength to stay invested. Mindset is key. There is no single investor that will brag about only having stock which is making a positive return. In reality, some stocks you buy will make money while some will lose money. The goal is to screen to our best ability stocks which have potential growth while minimizing losses when investing.
In this article, we will be discussing more on a few ways you can prevent or minimize your losses when investing. We will discuss more on the perspective of REITs investing. Please do note that this is not an article to help you completely eradicate losses but more of steps you can take to reduce the risk of losses. There are always risk in investing.
The first and most commonly known way to prevent or minimize losses when investing is through diversification. Like the old saying, “Don’t put all your eggs in one basket”.
When we say diversification, we do not mean that you should randomly pick 100 different types of stocks to diversify on. Too much diversification is bad too. The ideal diversification is through understanding what your portfolio needs by spreading risk across your assets. There are various ways an individual can diversify its assets:
Diversification across various asset class
The first and most important way of diversification is spreading your investment across different class of assets. This involves diversifying through different assets such as bonds, shares, safe-haven asset and etc. In this case, we are looking at REITs.
This allows your overall portfolio to have the right balance of various class of assets which will minimise your portfolio risk.
Diversification across different REITs sector
We have previously shared that not all REITs sector perform equally. By diversifying across different REITs sector, it reduces your risk when certain events adversely hit that sector.
Take the COVID-19 pandemic itself where the hospitality sector is badly affected. If you were to only invest in REITs in this sector, your portfolio will be in the negative zone. However, if you were to diversity across different type of REITs by including REITs in the industrial or even healthcare sector, your overall portfolio will look slightly different.
The point is you will never know which industry will be affected at any point in time. Hence, diversification helps mitigate this.
Diversification in assets in a different geographical region
The third way diversification can be achieved is through diversifying your REITs portfolios with assets in a different geographical region. We don’t mean that you should only invest in REITs that have assets in multiple geographical regions. What we meant is to invest in different REITs to help balance your portfolio geographical balance.
For instance, instead of purely focussing in REITs solely in China such as BHG Retail REIT and CapitaLand China Retail Trust, you should balance your portfolio by including some REITs with presence in a different location such as Singapore, Malaysia, Australia and etc.
A good example of why this diversification help in minimising investment risk can be seen through Mapletree North Asia Commercial Trust in which its assets is predominantly in Hong Kong. The protest in Hong Kong in 2019 has affected the REITs. If you were to only invest in assets in Hong Kong, chances are your overall portfolio will be in the negative.
While we have shared the importance of diversification, it is important to note that diversification should be done diligently. Every REITs you add on to your portfolio should be well researched.
2. Research and understand the company like it’s your business
Are you speculating or investing? Do you know the company well enough to put on your hard-earned money? We often heard of people investing through tips they received from their friends or over a coffee chat. If you were to solely rely on stock tips or following certain market hype, you are merely speculating and not investing.
There is nothing wrong with getting stock tips or reading on recent trends. What is wrong is investing in them prior to proper research. The next time before you invest in any stocks, always do your research to see if the stock is worth investing in and most importantly, does it fit your overall portfolio balance.
When you invest in a company, you have to treat it like you are the business owner. This can be done by simply knowing the business. One of the reasons why REITs is a good investment is how simple the business model is. Nevertheless, you will still need to do your own proper due diligence to understand the instrument well.
This simple exercise itself will help you minimise your overall risk in investing.
Although it is easy to forget sometimes, A share is not a lottery ticket..It’s part of a business.Peter Lynch
3. Avoid reacting to every piece of news
The third key ways to minimize losses when investing is to not panic and make decisions by reacting to every news. Market noise must be disregarded. However, please do not be confused between reading news and reacting to the news. It is important to keep yourself updated with ongoing events to help review your portfolio positions.
What you should not do is sell in a panic or buy based on hype. All decisions should be made based on the initial reason you have invested in. Did the REITs fundamental change? Short term drop which is not due to business fundamental shift is often a potential opportunity for value investors to accumulate.
Hence, it is important to always stay calm and not panic by reacting to every news cause chances are you will end up losing more.
That sums up the 3 ways we think every investor can easily apply in investing to help prevent or minimize losses in investing. There is no way you can completely remove the risk of loss in investing but this will help you better manage your risk of losses.
We hope you find this helpful. Do share with us on the steps you take as an investor in managing risk.