Your Guide to Minimizing Investment Risks and Maximizing Returns
7 tips that will help you retire wealthier
Welcome to The Profit Zone, where 12,000+ millionaires, CEO’s and high-performing entrepreneurs read the #1 financial newsletter on Substack, providing you with weekly insights on the stock market and tips you can’t find anywhere else.
Happy Tuesday!
Hope you’re having a great holiday season with your family.
The agenda for today:
👉 Indexes: more milestones for the big 3
👉 Nike: last week was rough
👉 Minimizing risk, maximizing returns: tips for risk management and avoiding big losses
Consider Going Premium
Being a free subscriber gets you access to our newsletter, but becoming a premium member gets you access to the meat and potatoes.
As a premium member, you get:
Deep dives into my favorite stocks
Portfolio management tips I don’t share anywhere else
My watchlists
What I’m buying/selling and why
What industries I’m looking at investing in
Access to the entire newsletter
You can test the waters before committing.
Consider joining on a 14-day FREE trial.
Click below to unlock premium content free of charge for 14 days.
Tweet of the Week
Advertise with Us
Do you have a business that needs some more exposure?
Want to get more eyes on your products?
Advertise to 12,000+ investors with this newsletter who are hungry for financial content.
Or advertise on our Twitter and Instagram.
Click here to book with us.
Weekly Market Update 🗒️💡
Indexes
The 3 major indexes marked their 8th positive week in a row.
This is the first time we’ve seen a streak like this for the S&P 500 since 2017 and since 2019 for the Dow.
The S&P 500 rose by 0.8% on the week, while the Dow rose 0.2%. The Nasdaq jumped by 1.2% on the week as well.
S&P 500 Sector Performance
10/11 sectors in the S&P 500 were trading in positive territory this past week, led by none other than utilities and real estate. On the flip side, consumer discretionary was down.
The utilities sector was the best-performing, up about 1%.
Real estate also outperformed, up 0.9%.
Inflation
The Fed’s inflation gauge came in less than expected rising just 0.1% last month and gaining 3.2% from a year ago, in line with expectations.
Cathie Wood’s ARK Innovation ETF is…. back from the dead?
Cathie Wood’s flagship ARK Innovation ETF is on the rise once again, beating the Magnificant 7 stocks so far in December, as well as Q4.
Her ETF has risen 15% in December while the Magnificant 7 have seen gains as follows:
Meta - up 8%
Alphabet - up 7%
Amazon - up 5%
Tesla - up 5%
Apple - up 2%
Microsoft - down 1%
Nike is struggling
Nike fell about 11% in midday trading on Thursday, marking one of its biggest one-day losses for the stock since September 30, 2022.
The dip came as the company published poor sales guidance and announced some cost cuts.
This created a domino effect across sports retail as other stocks like Foot Locker and Dick’s also traded at lower prices.
Your Guide to Minimizing Risk & Maximizing Returns
On your journey to financial freedom, preparing for unforeseen losses and managing your risk is an important step towards reaching your financial goals.
The problem is that most investors only focus on the growth aspect of their portfolios. Neglecting the “risk management” part of the equation.
High-quality stocks + cash flow + risk management = wealth
Remember:
It’s not about how much you make, but how much you keep.
You can retire a multi-millionaire just by making small consistent gains over a long period of time.
But many investors chase those 100x gains and want to get rich quick.
When in reality, they’re only hurting themselves. The volatility can turn into massive losses, and with massive losses comes fear-based trading.
When you let your emotions get in the way, you may sell a position that does not warrant to be sold.
And that can have a big impact on how much wealth you accumulate over time.
My message is simple:
Invest for the long-term
Generate cash flow from your portfolio
Build up a base in index funds
Minimize your losses
Then enjoy the wealth you’ve built.
Here are 7 steps to minimizing the risk of your portfolio:
1. Develop a Plan for Maximum Potential Loss
Anticipating losses is the first step to shielding your portfolio.
When you enter a position, you need to set a specific maximum loss.
This eliminates the need to think.
Let’s say you buy stock ABC at $50/share and you have high conviction that the stock will continue to grow. But the stock is in the technology sector which you know is naturally volatile.
Capping your loss at 20% might be a good idea, depending on your financial situation.
That means if the stock falls 20%, you sell and move on. No questions asked.
Capping your losses is a good way to avoid larger losses, but be careful using this strategy.
Some stocks will fall 20%+ on market news alone which could be immaterial to the business. So evaluate the situation carefully and ask yourself if you’d be okay with holding the stock if it were to drop further.
2. Focus on Asset Allocation
Asset allocation doesn’t get talked about enough.
Your portfolio breakdown is vital to your success.
Too many investors are heavily concentrated in specific sectors which can hurt their portfolios.
Regularly adapting to market conditions is important.
Evaluate which sectors are performing and which aren’t, as well as how heavily you’re exposed to those sectors.
It’s good to have a mix of uncorrelated sectors.
Meaning when one rises, the other falls. This helps balance out your portfolio over time.
3. Margin of Safety
Your margin of safety is your shoulder to cry on when things get bad.
This is the difference between the intrinsic value of the stock and your purchase price and it offers you some room for error should the market experience some high volatility.
If you don’t know how to calculate the intrinsic value, click here.
4. Stay Away from Portfolio Volatility