In this article LeoPatrizi | E + | Images
More than a year and a half of worries about inflation, rising interest rates and extreme government spending have increased the incertainty of investment markets. For this reason, it is imperative for both seasoned and novice investors to protect their portfolios.
I like to call it "bulletproof" your portfolio. There are a few steps you can take that will help you with this process.
The first is to look at the resilience of your stock.
During the pandemic, traditional rules of investing in established companies with high incomes and profits seemed to have been abandoned. According to Credit Suisse, one of the top performing styles in 2021 was the basket of stocks with a high probability of default on corporate debt.
Until 31st August, the shares of these potentially failing companies rose more than 28% over the year, while the S&P "500 has reached around 20%.
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However, in September, th Markets allowed investors to face reality. S&P 500 was down 4.8% for the worst month since March 2020.
What was the problem? Perhaps it was stubborn inflation, the possibility of higher rates of 'interest or even persistent supply chain issues, preventing companies from meeting their expectations forearnings for the remainder of 2021 and beyond?
As companies begin to report their third quarter results, investors will find out exactly what happened.
If expectations about future company earnings are lowered, the market will not be lenient and the stock prices of these companies will fall. The stocks with the highest valuations are the most revered. It's time to test the ability of your investments to withstand current headwinds and determine if they are indeed resilient.
A resilient business is one that can withstand the volatility that comes with it. 'operation during a full economic cycle, including a recession. Will the business survive if its sales or profit margins decline? In the long run, businesses, just like your household, need consistent, positive cash flow.
Access to argent usually comes from two places. One source is the sale of a company's product (the company's operations). The second is financing through loans (debts) or through the issuance of new shares in the company.
Companies that have been established for a long period of time should have sales and earnings strong enough that rounds of new debt or stock issuance are not necessary. On the other hand, a company that has a new technology or an unconventional product may need new financing for several years until its sales and profits become strong.
Both types of companies can be considered resilient and therefore less likely to experience a significant drop in their share price.
Take a deep dive
Now dive into the financial health ofyour investments.
While confirming your investment cash flow resiliency is a good start, there are some additional numbers and statistics that can be indicators of potential problems. The following data will allow further testing of financial health:
Profits and revenue growth: Check whether the company's profits and income in recent years are higher to profits and income from previous years. At a minimum, one would like to see that profit and income growth is on a positive trend. Of course, companies seen as innovators in technology or medicine may need some leeway .
Levels of debt and debt. balance sheet stocks: Compare the current dollar amounts of debt and stocks on the company 's balance sheet to the last two or threeyears. Do either of these items increase significantly year over year?
Next, take a look at the company's revenue and bottom line company, both of which can be found in the company 's income statements. Are they going down?
If the answer is yes to both of these questions, the company's cash flow from its operations goes down and they make up the difference by going to the bank - and / or shareholders.
The good news is that you don't have to be a financial analyst to find the answers to the questions above. Information is readily available through quarterly earnings announcements. Search the company 's website or check out previous financial press releases.
Now that you understand the numbers, you need to know how and when to play it safe and when. take risks.
Companies are starting tot to warn that the consequences of inflation and supply chain bottlenecks will create an inability to meet Wall Street expectations. Over the past three months, profit margin estimates have been lowered "for 140 companies in the S&P 500. When sales or earnings estimates are cut to a halt, so do its share price.
We are entering a period when companies that are disappoint will be punished more severely than in the past. The reason is extreme valuations and perfectly priced stocks. In preparation, understand how financially strong your business is over a full economic cycle.
Evaluate your firm's pricing power, its inelasticity of demand for its goods and services, and its ability to meet current demand.Also estimate the impact of the measures highlighted above during a period of longer inflation and weaker growth.
With your new understanding of the resilience of the flows of cash flow and financial metrics of your investment, you're ready to figure out how much you can potentially earn or potentially lose when it declares its earnings in just a few weeks. Failure to do so may result in severe penalties.
You can also take steps to preserve these gains.
How to keep the winnings Monty Rakusen | Image source | Images
Approach your portfolio of companies in the same way as an institutional manager by estimating the potential for the downside that the stock can have over the next 12 months .
Evaluate how falling sales and / or falling profit margins may affect theshare price. Go back and see how the business fared through past recessions or declining profitability.
This is not a complicated calculation. Spreadsheets are not needed.
If your estimated percentage upside is equal to or less than the estimated percentage down, take profit and / or sell the position. For example, if you think that there is only a 10% rise for the stock in the next 12 months, but your downside potential is 15%, then feel free to sell it.
If you are not comfortable with percentage calculations, review your company's estimates for its profits and observe how your stock price acts in the market. If the markets go down and your position goes down, set yourself a point where you sell some or all of it. If the markets continue to rise, take a look at the stock's price estimates. As the price gets closerApproach the consensus goal and if you agree with the analysis take some profit.
The past 18 months have been profitable and relatively easy for investors. However, economic and political uncertainty increases the chances of a market correction and seeing your gains disappear.
Now is the time to adopt investment discipline. The strategy outlined above will provide this discipline.
If you confirm the resilience of your investment, understand its financial health, and determine if the sale is warranted, you will have a higher likelihood of keeping the money. that you have. and achieve your long-term investment goals.
While investment managers are more rigorous, they essentially go through the same steps. You now have a strategy to hold onto your hard-earned profits.