Avoid putting all your money into a single investment or a single type of investment (e.g. stocks or properties). An investment portfolio with diversified asset allocation based on your investment objective, time horizon and risk tolerance can reduce risk and help you achieve your investment objective over the medium to long term.
Diversification can be achieved through holding different classes of assets such as stocks, bonds, funds, insurance saving plan and properties in your portfolio. You can also adopt a diversification strategy within one asset class, such as stocks. For example, compared to investing in a single stock, an exchange-traded fund which invests in a basket of stocks can help to achieve diversification in the stock market. Besides, the performance of different sectors may not be correlated closely to one another, e.g. the utility sector may not be impacted by a rise in interest rates as much as the financial sector. Investing in different sectors can therefore be a way of spreading your investment risk.
Stop loss strategy for stocks
Make use of stop loss strategy to protect your investments from possible significant losses. You can limit your losses by placing a stop loss order with a broker to sell a stock if its price drops to a certain level (i.e. the stop loss price specified by you). Alternatively, you can set a predetermined percentage, such as 15% below the purchase price, as the cut loss level. The stop loss strategy is a risk management tool that helps you manage the downside risk.
Dollar cost averaging
You could also consider dollar cost averaging (DCA) to smooth out short-term market fluctuations. DCA works best for long term regular investment (like MPF) but the principle can still apply in other scenarios. For example, if you plan to invest a lump sum amount in a stock (say HK$150,000), you can spread the purchase over three stages, e.g. invest HK$50,000 on any designated date in three consecutive months. This technique reduces the effects of short-term market fluctuations on investments by averaging out the costs of your investment over time.
Last but not least, you should always know your investment objectives, horizon, risk tolerance, projected financial resources and fully understand an investment product before making a purchase decision.