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Diversification and leverage are two key element




In previous days we have seen the two main rules in our opinion about how investing successfully in the stock markets. There rules are the same regardless or the country you invest in. It applies to stock investment in the US, in Europe but also in markets like Vietnam. The first one was that you should only invest money that you can afford to lose in a worst-case scenario. It is however very unlikely that you will lose all of your investment as long as you follow the other rules. It is true that some people have lost everything in the stock markets but the reasons it happened to them is closely linked to our third rule: any investor should be well informed! If an investor does his/her homework properly, one of the first things he or she will discover is that diversification and leverage are two key elements. Investors who lost all of their investments often invested in only one or two stocks, which means that their portfolio was not diversified. Diversification is key to reduce risks, and diversification can be achieved without compromising returns. Alternatively, or in top of this lack of diversification, some of these investors used leverage. Leverage is usually a bad idea when you invest in stocks. Putting it simply, it the markets as a whole fall by 33% while you used a leverage of *3, there are good chances that you will lose everything. This is even more thoughtless than what it looks at first since the markets can go down by 33% or more before bouncing back in no time (this is the kind of volatility that can be expected in markets like the Vietnam stocks market), which means that the investor not using leverage would end up not losing a dollar while you would be ruined.

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