How do pros protect their investments? - September 09, 2018

How do pros protect their investments?

Investment and wealth protection aren’t only important for everyday investors. Even billionaires do it, so they can keep their wealth as safe as possible. What can we learn from the legendary investors? Let’s see!

Looking at what legendary investors do is always a good idea. Not only because following the smart money can help with investments, but because it tends to predict market movements. There are other ideas we can learn from the bests of the industry.

Diversification above everything

We always say that diversification is the most important precaution when we’re investing money. Not putting all our eggs in one basket can help in every situation. It’s rather important when we’re choosing stocks. We should always buy several different shares so if one falls, others can balance it out.

How billionaires diversify their wealth

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But diversification isn’t only about stocks, it’s also about instruments in general. Billionaires know this too. Visual Capitalist lately created a short animation about the most important tricks of the top investors. Diversification took the first place. They mention that they only keep 1% of their wealth in cash, and they favor funds, stocks, real estates, bonds and other instruments in a well-picked mixture. (If you want to know how to mix stocks and bonds, read our post here.)

Other keys of their success

We can’t exactly mirror the path of billionaires, though. Common people don’t usually have big business interests like Warren Buffet or others. What’s more, real estate can work better for them, too. In their cases we’re usually talking huge real estates investments made with loans, not their very own money. They are usually able to pay their loans with their incomes from said estates and still keep some profit.

But the richest are doing things that all of us can learn from. As we wrote about it last year, two papers came out that were looking for why the richest are getting richer. The first reason was that contrary to the middle class, the richest prefer stocks over real estates. The stock market performs better than housing does. They also found out that after the financial crisis of 2008, stocks recovered much better than real estate. Stocks and bonds are also more liquid than real estates, so they are easier to sell when we need money.

Other ideas of the legendary investors

Visual Capitalist also gathered some of the investors’ ideas for better protecting their wealth. Founder of Greenlight Capital, David Einhorn “believes that financial repression and monetary debasement employed by central bankers can be neutralized with gold”. The founder of the world’s biggest hedge fund, Ray Dalio is “adamant that 5-10% of a portfolio should currently be held in gold”, they write. We also believe that gold has great attributes and it can protect us against inflation. We also wrote about how it may have a bright future.

The site also mentions Warren Buffet, whose fund Berkshire Hathaway has huge amounts of cash, so he can invest it instantly if there is a downturn on the market. It’s important to see that he doesn’t hold cash as an investment but to use it when it’s best. Buying low and selling high was always a main goal of investments. Paul Tudor Jones in the meanwhile dislikes treasury bonds, because he thinks they are expensive. But for the common people, they are still relatively risk-free instruments with guaranteed (but smaller) returns. What’s more, they can make their comeback soon.

In short, billionaires know perfectly that diversification of investments is the best thing they can do to protect their wealth.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.

(Header image: Pixabay)