This article concludes my five part newsletter series I published a couple of years ago on investments – Letting Your Winners Run and Protecting Your Downside.
Part 5 0f 5 – How It All Works Together (The Final Exciting Chapter):
Okay, now how does this all work together? First, select the investments you want, making sure you diversify between assets and across industries. Now pick somewhere between 20 and 25 investments and put equal amounts in all of them (keeping position sizes between 4 and 5 percent of assets.) Keep track of your stop losses – about 15% to 25% of the investment.
The worst case situation – an investment drops below your stop loss. If you follow your stop and sell at the open the next day, with the position size of 4-5% your worst loss will be around 1 to 1 1/2% percent of your assets. A few of these will probably hurt a little, but you have small losses to deal with rather than big ones. If a couple of investments take off, you can let your winners run, using the stops to stay in the investment and then tighten your stop loss and when you sell you will protect most of your profits.
Best of all, you can do it without thinking about it; you just follow the rules and have better control of your investments. Over the long haul, using these simple ideas to create an investment plan and an exit strategy should increase your returns and let you sleep a little better at night.
Remember, if you missed any parts of this series, you can access them all in the blog area of my website:
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