Position Sizing: You can Win with it
by Jibeesh N
Rookie Investor !
I used to be an investor who earned only meagerly at one time. I knew a friend who had huge amount of money invested in shares.
But he was in peril because. he had a stock which occupied 90% of his worth !,He loved that stock so much and refused to sell. He didnt use a positioning system.
I told him this was foolishness and reminded that once the money is gone, he’ll become nothing !
But he argued that the stock was doing well and that there was no reason for him to sell !!!
I told him that the stock has already given him the returns for what it was worth and that it was time to part and reminded him that the sun will not shine forever !. He couldn’t agree and since then he wouldn’t discuss this topic with me ! He kept holding on to it as a four year old child would do a Teddy !
The rest is history…His stock plummetted down to penny level and Alas, his fortune was gone with the wind ! This story may be familiar to a whole lot of people as all of us have at some point or other done something foolish with the stocks.
People will be confident when they see a stock rising to heavenly height. They will get mesmerised with their achievement and will forget that the stock can go back to the depth that it has come from.
This realisation may pain some people in the heart…
The only solution is to use position sizing strategy !!!
But most people, like my friend mentioned above fails to do just that !
For starters, never ever should you invest more than 5% of your money in a single stock. It can but, rise up and move out of that proportion by itself. But, in the beginning…Remember the 5 %.
Here’s why you should follow this advice, especially if you consider yourself risk averse:
Never lose more than 10% in a single trade
On a loss of 20% on a position of 5% the impact is minimised ti just 1%
And if you have no more than 60% of your portfolio in equities, as we currently recommend, the maximum potential harm done by a single stock cratering is this: Your total portfolio is worth six-tenths of a percent less.
Anyone with common sense can get that !
You can Raise your income and Lower the risk by:
You should always keep an eye out for everything ! Set stops, allocate wisely and proportionately.
When you see your favorite stock rising and becoming a major portion of your fortune, don’t forget to put trailing stop behind it !
Never forget your basics because they always pay…They are the base of all strategies.
As we all know that it is those small footsteps that we had learnt to walk in childhood, we are using still now !!!