The task of accumulating wealth and ensuring long-term financial security is often discussed alongside the idea of winning. And while it’s fine to think of financial planning this way, it may be just as important to simply avoid losing. Smart investing involves looking for gains over time, but also escaping costly losses when the market goes down. Let’s take a look at some ways we can “win” financially simply by avoiding losses.
1. Avoid overpriced stocks
The last thing you want is to buy a stock and immediately see it take a dive. If you are a young investor with a long time horizon, you can usually get away with putting your money in the market at any time. But it is important for anyone to avoid buying stocks when they are overvalued and perhaps due for a correction.
It’s tempting to buy a stock if shares have been moving upward, because we all like to invest in companies that are doing well. At a certain point, however, share prices can be too high based on the company’s earnings. It’s important to learn the basics of how to tell if a stock is fairly valued.
A price-to-earnings ratio is an important consideration in valuing a stock. A P/E ratio is the share price divided by earnings-per-share (EPS). A P/E of more than 25 is on the high side, though P/Es vary by industry. Take time to learn what typical P/E ratios are for the sector you’re looking to invest in.
Another rule of thumb to keep in mind: If a stock has been consistently setting new 52-week highs, it may be due for a pullback.
If a company’s share prices seem overvalued, it’s wise to practice patience or look elsewhere for better value. This will decrease your likelihood of losing money on the investment.
2. Know when to cut your losses
One common piece of investing advice is to stay the course and avoid panicking when shares of stock fall. This is sensible, but it should be balanced with an awareness of when to cut your losses.
There’s a fine line between being patient and sticking with a…
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