I am not a financial advisor, although I did have my securities licenses at one time. I don’t pick stocks or try to tell which way the stock, bond or commodities markets will go at any time. In fact, I hate doing security research. I have a subscription to a group of newsletters that I feel have done pretty well in good times as well as the bad times and use those to invest. Two things I have learned from investing in the markets:
(1) To be successful investing, limit your losses.
(2) See (1) above.
If you lose 50% on an idea, you have to double it just to break even again. A portifolio with a bunch of pretty good investment ideas can be wiped out by one real disaster you fell in love with and held until it was down 95%.
I feel the best way to limit losses in investing is to diversify your investments and know when to sell. Don’t put more than 5% or so of your investment money in any one idea (called position sizing) and use a trailing stop loss to tell you when to sell an investment. If you use a 25% trailing stop loss, when your investment closes the day down 25% from its high from when you bought it until now, you sell it at the beginning of the next day when the market opens. So it you buy something at $10 a share and it goes to $7.5, then you sell it the next morning. If it goes to $20 a share, you hold it until it comes back to $15 a share then sell the next morning. And so on. If you follow this strategy, you are only risking 1.25% of your total investment portfolio on any one idea. It also makes you sell losers rather than riding them down in flames and lets your winners run. When the winners slow down you know when you will sell them. You will keep 75% of the highest price the security was at while you owned it.
This is the best way I have seen to limit your losses in investing (besides putting your cash under your bed, of course). You can also diversify across different industries and asset classes to limit your risk, but using trailing stops and position sizing will help you limit your losses, which over time should help your rate of return.