3 Investing Rules for Not Losing Money in Stocks

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Simple investing rules to protect the money you earn and grow your portfolio

Investors are horrible at…well, investing! Every year, investors watch their money go down the toilet because of bad decisions and bad stocks.

In this video, I’ll show you the three biggest mistakes investors make and three rules to keep you from losing money in the stock market.

Then I’ll reveal a simple investing strategy that is so easy, you’re not going to believe it at first.

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The Secret to Making Money Investing is Not Losing It!

Probably one of the most frequent questions I get here on the channel is how do I make money in stocks…and most are shocked by my answer.

Making money in stocks is EASY!

The stocks in the S&P 500 have produced a 15% annual return over the last decade, fifteen percent a year since the pit of 2009. That’s without doing any stock-picking, without finding those best of breed names we talk about on the channel. Just investing in the broader market.

Now the question everyone should be asking…how do I not lose my money in stocks once I’ve made it.

Think about it. Investing just $100 a month at that 15% annual return means having over half a million dollars in 30 years. That’s trading one cup of coffee a day for $521,000 and simply putting that money in stocks.

But that’s not what happens is it?

The average investor makes between 2% to 4% a year according to an annual survey by DALBAR research because they make all the worst investing decisions. They commit the three cardinal investing sins we’ll talk about in this video and they lose money.

Average Investor Return Stock Market Basics

In this video, I’ll show you why investors lose money in stocks and three rules for keeping your hard-earned dough. We’ve all been fortunate enough to live through the longest bull market in history. Now I want to show you how to protect that money, keep growing your portfolio and keep from falling into these biggest investor traps.

Besides these three rules to not lose money in stocks, I’m going to share a bonus investing strategy that will tie everything together towards the end of the video. Make sure you watch for that because this is the strategy I use as well as most of the analysts on Wall Street.

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Investing Rule #1: Limit Your Losses

And our first rule here is to limit the amount you have in any single stock to 5% or less.

Investors love to get emotional about shares of a company. Just ask an investor what they think of Tesla or Apple or their favorite dividend stock…and God help you if you say something bad about it!

The problem with this is they also have a tendency to go all-in on these stocks. How many times have you heard someone say, “I’ve got all my money in tech stocks,” or “I just put thirty grand in Tesla ahead of earnings.”

You might not even realize it until it’s too late. You buy into a company and get really excited about it…but the share price starts dropping. No worries, you buy another chunk to dollar-cost average your investment. Now the shares only have to rebound a little for you to make your money back and then some.

What happens though is that before you know it, you’ve got 20%, 30% or more of your money in this stock. I have an friend that followed coal miner Peabody Energy all the way down in 2016, eventually having 30% of his portfolio in the stock and losing $30,000 when the company filed bankruptcy.

Limiting the money you’re going to invest in a single stock means avoiding these apocalyptic losses where you wipe out years of gains.

So the rule I use is 5%, no more than 5% of my wealth in any single stock. This means I might start with an investment of 2%, so if I have $100,000 in stocks, I might invest two grand in a stock. That leaves room, that remaining 3%, to buy more of the stock if I do want to dollar-cost average lower.

But I stick with that rule. If I keep buying and hit that 5% limit on the stock, it doesn’t matter how much I love the company, I do not buy a single share more.

I know it seems like this is going to limit your gains in winning stocks but please believe me, this rule is going to save your ass! Ignore it and eventually you’re going to chase that losing stock all the way down and lose tens of thousands, wiping out a big chunk of your portfolio.

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Investing Rule #2: Forget about the Past

Another rule to avoid losing money in stocks is to always evaluate a stock on it’s future potential, not on what’s happened in the past.

This is a tough one because we get a line of reasoning in our heads and it’s very difficult to dislodge it, even when new information comes along.

For example, you invest in Netflix on it’s unrivaled dominance in streaming. No other major competitors, huge potential market and great growth. Then competitors start entering the market, Disney-plus, HBO Max, Apple. Netflix starts losing subscribers but you still stick to that idea the company is the best of breed in streaming. You avoid looking at the new information in the market because it conflicts with that initial investment reasoning.

There are a lot of deep psychological things going on here that you have no control over. We’re hard-wired to avoid losses and stick to our first impressions.

Another big mistake investors make is seated in what’s called loss aversion, a sub-conscious avoidance of even acknowledging losses or mistakes. Have you ever been down so much in a stock that you just didn’t want to look at your portfolio? Have you ever held on to a stock, despite losing 20- or 30-percent because you just didn’t want to take the loss?

You cannot get hung-up on how much you paid for a stock or how much you’ve lost. If you thought shares of that $10 stock were going to $15 but then new information came out that affect your reasoning, you have to look at those shares again and honestly decide if you still want it in your portfolio.

I know it sucks to take a loss on an investment but you’ve got to constantly be re-evaluating your stocks with all the current information, both the good and the bad. If the shares are no longer a good investment, if that upside potential no longer meets your return requirement, then you need to look for a better investment.

This doesn’t mean sitting in front of CNBC or your investing platform 24 hours a day. Barring any shocking headlines, you can re-evaluate your stocks once every three months after earnings are reported. In that strategy I’ll share later, I’ll show you how to make this easier and less time-consuming, going back to analyze your stock picks.

The point is, it’s not how much you paid for a stock. It’s not the price targets analysts had on shares when you bought it. Whether you’ve lost money or not, none of this has anything to do with keeping that investment. The only thing that matters is an impartial assessment of the future stock price and whether that growth is enough to hold or invest in something else.

Investing Rule #3: Know When to Fold

Our third rule before we get to that bonus investing strategy is always have a defined point when you’re going to sell a stock.

This one ties in with that last rule to help you avoid holding those losing stocks as they burn your portfolio to the ground.

Selling those losers is one of the hardest things to do and part of it is because of shifting expectations. For example, maybe you buy a stock at $100 and expect it to go to $150 a share. Then the shares fall to $80 each and now maybe you only think the fair value is $105 a share.

That’s not much above what you bought it for but it’s still a 30% increase from the new, lower price.

And it’s not just expectations on price that can shift. You might have invested in a company because of it’s reputation for excellent customer service. Then a scandal is uncovered where sales reps were abusing client accounts and management let it happen.

If that sounds familiar, it’s exactly what happened to Wells Fargo investors over the last few years. The company was the poster-child for customer service until it was discovered that client accounts were being used to open new accounts, charging millions in fees just abusing that trust. The stock has been dead money ever since.

When you buy a stock, bullet point out the reasons down to your target price and competitive advantages the company has over its peers. Then bullet point out a set of reasons you might sell the shares.

This is going to help you avoid that idea of shifting expectations for a stock. If one of your rules is that you sell a stock that has lost 15% then that takes all the risk out of the decision. It reduces the possibility to zero that you’ll follow any stock down to bankruptcy.

If you write out one of your reasons for investing is because of big potential in a new project, and the company ends up scrapping the project, then that avoids you looking for an excuse for holding onto the shares. You formalized your reasons for buying the shares and what would make you change your mind. It takes all the guesswork out of investing and keeps you from making some of those big money-losing mistakes.

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My Favorite Investing Strategy

Now I want to share that bonus investing strategy with you, a strategy that’s going to make investing as stress-free as possible and the one I use. The core-satellite strategy is where you put 60% to 75% of your money into broad funds or ETFs. We’re talking about funds that cover the asset classes like stocks, bonds and real estate. Maybe you invest in a fund of dividend stocks or one with international companies.

core satellite investing strategy example

These funds are going to give you those market returns, diversify your portfolio for a smoother ride.

Then you take the rest, that 25% or so of your money, and invest in a small handful of individual stocks, maybe 7 to 12 stocks. By limiting your portfolio to less than a dozen stocks, you solve a lot of the problems that lose investors’ money.

You’re not constantly looking for new stock picks. That’s going to save you hours plus mean you’ll only be investing in the very best stocks you find. It makes it much more practical to keep up with your stocks, keeping up with the research and where the company is going. That’s something you can’t do if you’re investing in 20 or 30 companies.

Using these three rules along with the core-satellite strategy and you will avoid making the worst of those investor mistakes that lose money. You’ll get those market returns plus the instant diversification from that core part of your portfolio. You’ll get the potential upside for a few extra percent return on your handful of individual stocks and you’ll know when to sell to avoid losing money.

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