How to avoid Potential Loss?

Dealing with investment, one of the challenge questions always raise by investor, how to avoid potential lost in your investment portfolio? How can anyone predict that Lemon Brother going to collapse in 2006? There are many example people buying a stock that seem with very good performance, but turn bad after 1 or 2 years holding. It’s really hard for one to predict the market, especially on individual stock. However, there are several precautious steps we can take, in order to minimize the potential risk.

There is no free lunch in the world, especially in journey of investment. Some home work need to be done below getting involved to buy a stock. This include go through the last 5 year’s financial reports to ensure the company actually having the stable income and strong balance sheet. The hypothesis question, what will happen if financial turn bad, need to keep in mind of investors. What would be the main income to sustain the company’s operation in the worst case scenarios?

Even we find a good company to invest, do not invest all in one basket. The better solution here is trying to diversify into several different sector, each sector only select the best. Ideally, do not put more than 10% of the overall fund into one sector or stock. At least this will help to mitigate and drive to prevent huge potential lose that will incur should we over confident with our imagination on chasing high investment return.

Related link:
1. Lesson from Warren Buffet
2. The Purpose Of Investment