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2 New Year’s Resolutions Every Investor Should Make

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This past year, we saw a turbulent time in the markets. Both the NYSE and TSX were doing well and hit record numbers. However, the past few months have undone a lot of that momentum and the TSX is just above 14,000 while the Dow Jones looks poised to finish around 23,000, nowhere near the highs they reached in 2018.

In 2019, things could be even more volatile as political issues in the U.S. show no signs of slowing down and if an impeachment takes place that could create even more instability in the financial markets.

There are many other headwinds facing the markets as well, including rising interest rates and wages, trade wars, and low oil prices (particularly for Canada). Who knows what else might happen in the coming year, and unless you’re an investor that’s planning to hold for decades, then you’ll want to be ready in case disaster hits.

What should you do?

While there’s no way to predict what can happen, there are ways that you can protect yourself and limit your losses.

Plan for an exit, and have stop-losses in place

You need to have an exit strategy. Setup a stop-loss on every stock you have ahead of time so that way if things go bad, you can get out before they get even worse. While stop-losses aren’t perfect, and I’ve mentioned before how they can give you a false sense of security, they can help minimize your losses. After all, if the markets tank as a whole this year, it won’t be a single stock that falls, they all will and it’ll be gradual as opposed to a big 20% decline in one day.

The reason you should plan your stop-losses ahead of time is to take the emotion out of your decision making. When stocks drop in value, the temptation is to hold on and wait for things to pick up. The problem becomes is that your emotions start playing a role and prevent you from executing.

Making a strategy and a plan well before then can help avoid that from happening. It’s a good way to learn to become a more disciplined investor and prevent yourself from getting swept up in news reports, rumors, or what your peers are telling you.

Avoid the hype and stick to fundamentals and ratios

You may have noticed that some of the hardest hit stocks this year have been the ones trading at the highest multiples. Amazon.com, Inc. (NASDAQ:AMZN) hit over $2,000 a share and looked unstoppable earlier this year. The problem was the stock was heavily overvalued. It and other tech stocks were trading at over 200 times their earnings. It wasn’t sustainable over the long term, and now it’s fallen to below $1,500 and could go even lower.

In just three months, Amazon’s stock has fallen by more than 25%. By comparison, Wells Fargo & Co (NYSE:WFC) has declined just 13% during that same time period. The reason is that the stock wasn’t overpriced, or at least not as heavily as Amazon’s stock was.

This is where using fundamental analysis and using ratios can help you prevent big corrections from happening to your investments.

Invest in stocks that have low price-to-earnings and price-to-book multiples. If you really want growth stocks, then look at PEG ratios as well. There’s a lot of data out there that can help investors arm themselves for uncertain times, and while some losses may not be avoidable, all-out disaster is.

Stick to these two practices and you’ll be help protect your portfolio during what could prove to be a very challenging year for investors.