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5 Ways to Prepare Your Portfolio for a Black Swan Event in 2022

  • Black swan events are rare and hard to predict. The 2008 financial crisis and Covid-19 are both examples of this.
  • Diversifying your portfolio is one way to protect yourself from the volatility.
  • Another strategy is to be aggressive. Act like Warren Buffett and treat hard times in the market as an opportunity to buy discounted, high-quality stocks.
  • Investors also should get in the habit of creating multiple portfolios with different goals.
  • Stay flexible. Having an open mind and being ready to adapt will keep you from losing as much money.
  • Lastly, investors need to stay positive. Black swan events are not a reason to avoid participating in the stock market.
Black Swan Event - 5 Ways to Prepare Your Portfolio for a Black Swan Event in 2022

Source: nancekievill / Shutterstock

A black swan event is an unpredictable and unforeseen event that has major implications. While it’s impossible to predict exactly what will happen in 2022, there are some steps you can take to prepare your portfolio.

Importantly, investors should note that there’s no cure-all for such market havoc. However, using these tips, you can plan for a black swan event and secure some safety.

Tip No. 1: Diversify Your Investments

a bag of money and several different asset classes in the form of blocks balancing on a scale

Source: William Potter/Shutterstock

To protect your portfolio from impact events, you have to diversify investments. This means investing in various assets, including stocks, bonds, and real estate, so you’re not too vulnerable to high-impact events like stock market crashes.

A diverse investment portfolio is important. Just like you need to venture outside your comfort zone when considering your net worth, you should also consider international investments. Diversification should include various locations, not just different sectors.

A diversified investment portfolio also includes a mix of asset types and investments. The goal is to minimize risk while still achieving growth. For example, investors might purchase large- and small-cap stocks within the stock asset class. By taking this approach, an investor can help mitigate the risk associated with any particular investment.

Of course, diversification does not guarantee safety from loss. However, it can help reduce a portfolio’s overall risk and potentially provide more stable returns over time.

In addition, black swan events often happen because people are caught off guard. It’s vital to stay up-to-date with what is happening in the news and industry trends. This includes everything from interest rate hikes to geopolitical shifts.

Tip No. 2: Embrace the Opportunity

An image of a bull standing behind a stock graph with an upward trend; growth stocks

Source: Zeedign.com / Shutterstock

What’s better than a buy-low, sell-high strategy?

Warren Buffett is well known for his extraordinary investing successes. His investment strategy is simple: Buy low and sell high. However, it is his willingness to take risks that sets him apart from other investors.

When others are selling in a panic, he sees an opportunity for bargains that often result in a windfall. His aggressive investing has made him one of the richest people in the world. If you want to follow in his footsteps, you need to be willing to take risks. There’s never a better time than now to start.

Let’s look at two of his iconic purchases to put things into perspective.

Buffett started investing in Coca-Cola (NYSE:KO) stock soon after the stock market crash of 1987. This long-term investment has put a smile on his face. The company’s shares have increased 119.7% in the last 10 years alone.

American Express (NYSE:AXP) is another example of Buffett thinking ahead of the curve. He initiated a stake in the credit card company in 1963 when it was a financially strapped enterprise. Over the years, Buffett has used the odd black swan event to purchase more shares in the company at affordable rates.

This approach is not for everyone. When the stock market is down, many investors will close their wallets. However, by adopting an aggressive approach like that of Warren Buffett, you stand to benefit immensely.

Tip No. 3: Create Multiple Portfolios

Man holding stacks of money. Millionaire.

Source: Epic Cure / Shutterstock

Many people view investing as a hobby. Having a hobby portfolio is essential if you are one of those investors. It will help you make better decisions and give you a sense of satisfaction.

In addition, hobby portfolios can be a great way to make high-risk, higher-reward investments. When you invest for fun and not profit, you may be more willing to get involved in something risky that could pay off well. So if you’re looking for a way to improve your investment results, consider creating a hobby portfolio.

This is important because many newbie investors entered the markets during the height of the pandemic and had a massive impact. They flooded Reddit with their opinions, which in turn caused a craze that continues to impact the markets today. However, this investment model also involves significant risk, as seen from the massive movement in GameStop (NYSE:GME) and AMC (NYSE:AMC).

How do you balance the approach, then?

One way to reduce investment risk is to have multiple portfolios with separate high- and low-risk investments. You can have safe stocks in one portfolio, such as Disney (NYSE:DIS), Procter & Gamble (NYSE:PG), Starbucks (NASDAQ:SBUX) and Apple (NASDAQ:AAPL). In the high-risk portfolio, you can have Coinbase (NASDAQ:COIN) or ChargePoint (NYSE:CHPT), which are true-blue growth stocks. Having this approach will allow you to get the best of both worlds.

Tip No. 4: Be Flexible When Facing Black Swan Events

An illustration of a man in business attire doing a split between two rolling chairs

Source: Shutterstock

A black swan event often requires quick thinking and adaptability. If you’re rigid in your thinking, you may be unable to adjust to the new reality. Try to stay flexible and open-minded so you can adapt as needed.

One way to protect yourself is to employ an effective hedging strategy. Hedging is important for investment portfolios. It can ensure you get a return on your investments and reduce the risk associated with any asset. For example, if you are worried about a stock market crash, you might invest in government bonds or exchange-traded funds (ETFs) that track different market parts.

Regardless of how much you want to invest, all investors must have a robust strategy. The subject of your investment plan should be based on your goals, level of risk tolerance, and time horizon. For example, if you are investing for retirement, you will want a different strategy than investing in a child’s college education.

Reviewing and updating your investing strategy as your goals change is also important. Your investment mix should also change as your time horizon gets shorter or your risk tolerance changes. This strategy is worth considering for anyone who wants their money working hard while they take care of other responsibilities.

Tip No. 5: Stay Positive

Business psychology concept and wealth thinking

Source: Shutterstock

Some people may not believe that investing in the stock market is for them because of the unpredictability. While black swan events may happen, they’re part of what makes markets so interesting — you never know what will happen next. Do not let it deter you from pursuing your investment goals.

The world is unpredictable, and no one knows what the future holds. It’s important to prepare for financial crises by understanding how they happen so you can respond rationally.

A black swan event can be overwhelming, but it’s important to maintain a positive attitude. Keeping your spirits up will help you weather the storm and reach the other side stronger than ever.

On the publication date, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.


Article printed from InvestorPlace Media, https://investorplace.com/2022/08/5-ways-to-prepare-your-portfolio-for-a-black-swan-event-in-2022/.

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