Op-ed: Here’s how to ‘bullet-proof’ your portfolio

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  • There are steps you can take to protect your portfolio amid market and political uncertainty.
  • If you verify the flexibility of your investments, understand their financial health and determine whether sales are warranted, you will be more likely to keep the money you have made and long-term investment goals.
  • While investment managers are more rigorous, they go through basically the same steps. Now you have a strategy to survive on your hard earned money.

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Over a year and a half of worries about inflation, rising interest rates and excessive government spending have added to the uncertainty of investment markets. For this reason, it is imperative for experienced and novice investors alike to protect their portfolios.

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I like to call it “bullet-proofing” your portfolio. There are certain steps to be taken that will aid in this process.

The first is to review the flexibility of your stock.

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During the pandemic, the traditional rules of investing in established companies with strong revenues and profits were thrown aside. According to Credit Suisse, one of the best-performing styles in 2021 has been the basket of stocks with a high probability of defaulting on the firm’s debt.

Through August 31, shares of these potentially defaulting companies rose more than 28% for the year, while the S&P 500 came in at nearly 20%.

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However, in September the markets gave investors a reality check. The S&P 500 was down 4.8% for the worst month since March 2020.

what was the issue? Perhaps it was stubborn inflation, the prospect of rising interest rates or even continued supply chain problems that have resulted in companies being unable to meet their earnings expectations for the remainder of 2021 and beyond?

As companies begin reporting their third-quarter earnings, investors will know exactly what happened.

If the companies’ future earnings expectations are cut, the market will not be kind, and the share prices of these companies will fall. The stocks with the highest valuations are the most respected. It is time to test your investments’ ability to withstand the current adverse conditions and determine if they are really resilient.

A resilient company is one that can withstand the volatility that comes with operating during a full economic cycle, including recessions. Will the company survive if its sales or profit margin drops? Over the long term, companies, like your household, need consistent and positive cash flow.

Access to cash typically comes from two places. One source is the sale of a company’s product (the company’s operations). The second is financing through debt (loans) or the issuance of new stock in the company.

Companies that have been established for a long time must have sufficient sales and profits so that new debt or stock issuance rounds are not necessary. On the other hand, a company that has a new technology or a non-traditional product may need fresh financing for several years until its sales and profits become strong.

Both types of companies can be considered resilient and, therefore, are less likely to suffer a major drop in their stock prices.

take a deep dive

Now, take an in-depth look at the financial health of your investments.

While verifying the cash flow flexibility of your investments is a good start, there are some additional numbers and figures that can be indicators of potential problems. The following data will further test the financial health:

Income and Revenue Growth: Review whether the company’s earnings and revenues in recent years exceed earnings and revenues in previous years. At the very least, one would like to see that earnings and revenue growth are on a positive trend. Of course, companies that are considered innovators in technology or medicine may need to offer some leeway..

Debt and Stock Levels on the Balance Sheet: Compare the current dollar amounts of both debt and stock on the company’s balance sheet over the past two to three years. Are any of these increasing significantly from one year to the next?

Next, review the company’s revenue and net income, both of which can be found on the company’s income statement. Are they decreasing?

If the answer to both of these questions is yes, then the company’s operations are declining cash flow and they are going to the bank – and/or shareholders – to make up the difference.

The good news is that you don’t have to be a financial analyst to find answers to the above questions. The information is readily available through quarterly earnings announcements. Search company website Or review previous financial press releases.

Now that you understand the numbers, you need to know how and when to play it safely and when to take risks.

Companies are starting to warn that the consequences of inflation and supply-chain disruptions will lead to an inability to meet expectations from Wall Street. For the last three months, the profit margins have been estimated at 140. decreased for Companies in the S&P 500. When a sales or profit estimate for a company is deducted, so is its share price.

We are entering an era where companies that disappoint will be punished more severely than before. This is because of overvalued valuations and stocks that are priced to perfection. In preparation, understand the degree of financial strength of your company during an entire economic cycle.

Evaluate your company’s pricing power, the elasticity of demand for its goods and services, as well as its ability to meet current demand. Also, anticipate how the metrics highlighted above will be affected by longer periods of inflation and lower growth.

With the cash flow flexibility of your investments and your newfound understanding of financial metrics, you’re ready to determine how much you can or could potentially earn when you report your earnings in just a few weeks. might lose. Failure to do so will result in severe punishment.

There are also steps you can take to preserve those benefits.

how to stay on profit

View your portfolio of companies the same way as an institutional manager Estimating how much the stock may rise and fall over the next 12 months.

Evaluate how short selling and/or decreasing profit margins may affect the share price. Go back and see how the company has fared during previous recessions or low profitability.

This is not a complicated calculation. Spreadsheet is not required.

If your projected upside percentage is the same or less than the estimated downside percentage, take profit and sell the position. For example, if you think there is only a 10% upside for the stock over the next 12 months, but your potential decline is 15%, then by all means, sell something.

If you’re uncomfortable with percentage calculations, review your company’s earnings estimates and see how your stock price is performing in the market. If the market is retreating and if your position is falling, set a point where you sell all or part of it. If the markets continue to move upwards, review the stock’s price projections. As the price moves closer to the consensus target and if you agree with the analysis, take some profit.

The last 18 months have been profitable and relatively easy for investors. However, economic and political uncertainty is raising the prospect of a market correction – and seeing its gains disappear.

Now is the time for investment discipline. The strategy outlined above will provide this discipline.

If you affirm the flexibility of your investment, understand its financial health and determine whether a sale is warranted, you have a greater chance of retaining the money you made and reaching your long-term investment goals. Will be

While investment managers are more rigorous, they go through basically the same steps. Now you have a strategy to survive on your hard earned money.

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