A Simple Rule That Can Make a Big Impact on Your Investment Portfolio

by Don Harder
(Chicago, IL, USA)

Ask any run-of-the-mill advisor or stock broker for a stock tip and you are likely going to get a pious lecture about how market timers tend to lose money and that your best bet is to buy good companies with solid earnings, to diversify your portfolio, and to dollar cost average periodically.

Once upon a time this was sound advice but if you took it over the past 10 years your money market account probably outperformed your stock account.

Picking a good basket of stocks isn’t what it used to be.

What do you do if a stock you pick loses money? Do you have a sell plan or do you just take your advisor’s advice and hold and hope for better days?

The simple fact is, no one knows the future and some of those promising companies you invest in are going to turn into duds. The good news is, you don’t have to hold and hope that your losers turn into winners if you apply a simple rule to your investing approach.

“Make more money when you are right than you lose when you are wrong.”

Here are a couple of important facts every investor should be aware of:

1. It’s possible to be wrong 50% of the time and still be a wildly successful investor.


2. It’s possible to be right 80% and even 90% of the time and still lose money.

The difference between success and failure has as much to do with managing your investments after you buy them as it does in picking good stocks. One or two big losses can wipe out all gains in your other investments. But, if you heed the rule above and make more money on your successful stock picks than you lose on your unsuccessful stock picks you can turn your portfolio into a real winner.

A Simple Money Management Strategy That Can Make a Big Difference

We mentioned above that if just half of all stocks you pick pay off you can be an extremely successful investor.

We’ll keep things simple in the example below for the purpose of demonstration. Let’s make an assumption that you buy shares worth $10,000 in four different companies. What happens when losers are quickly sold and only winners are kept?


There are only two rules in this simple money management strategy:

Rule 1: If the price of the stock moves against your purchase price more than 3% you sell and take a loss.

Rule 2: If the price of the stock moves up 10% you sell for profit.

Now, let’s see if this is a profitable strategy. We will assume that two of your investments move up and two fail; the same odds offered by a coin toss.

Stock 1 = $1000 profit
Stock 2 = $1000 profit
Stock 3 = $300 loss
Stock 4 = $300 loss

Total = $1,400 profit

So we see that indeed, this is a successful money management strategy.

Keep in mind the numbers can be changed and long term investors may wish hold out for more than just 10% and use a wider sell price than just 3%; again, the numbers above are used only for the purpose of illustration. One might simply just decide to adjust the sell price higher and higher protecting profits while allowing the price to continue to enjoy gains.

The idea here is, as long as you earn more money on your successful investments than you lose on your unsuccessful investments you ensure that your investment account is always moving forward and never slipping back. You do this by cutting your losses quickly and letting your winners run.

That’s a whole lot better than parking your money in the market for 10 years and earning nothing, right?

Donald D Harder is an investment advisor with over 17 years professional market experience and is President and Chief Stock Market Analyst for Securities Research Services, an online stock trading newsletter service. Don served as a financial advisor for American Express Financial Advisors and later served on the board of directors at Nettrader.ru, a mid-sized Moscow-based online securities brokerage. Mr. Harder strictly adheres to an investment philosophy that focuses primarily on reducing risk, for if you manage risk, profits generally take care of themselves.