How Not to Blow Up Your Portfolio

Assuming average investing capability and not withstanding a prolonged economic depression the following would help an investor to avoid devastating and permanent loss at the portfolio value level.

  • Diversification through prudent asset allocation – the key here is determining what uncorrelated assets to buy and in what percentages
  • Periodic re-balancing of assets as percentages rise above pre-determined choices
  • Avoiding excessive leverage at the portfolio level or even avoiding leverage altogether.
  • Hard-caps on what percentage to allocate to a particular asset class and individual asset selection. For example, not allowing your position in stock XYZ to exceed 10% of your portfolio.
  • Be careful with averaging down
    • Value investors are notorious for averaging down and many have done so successfully but there are some general rules with respects to it including:
      • Avoid averaging down (alot) on highly financially leveraged businesses
      • Avoid averaging down (alot) on highly operationally leveraged businesses
      • Avoid averaging down on companies that face obsolesce

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