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Your three-step action plan for successful investing

by , 15 September 2015

When the markets seesaw up and down like they have been of late, it makes many investors nervous. Will the market just keep falling?

The first thing that's important to realise is you can't forecast what's going to happen in the markets. No-one can.

But what you can do is take steps to prepare for what could lie ahead.

This means following a simple investment strategy that removes your emotions out of the equation and protects you against losses but allows you to make money.

So what are the steps you need to take?

Read on to find out…


Step 1: Include asset allocation in your investment strategy


This is the first element you need to include in your investment strategy.

Asset allocation is how you spread your money across different assets such as stocks, bonds, property, gold and cash, and other assets.

This step is responsible for 90% of your long-term returns.

If you have too much of your investment pot in stocks, you’re going to feel the effects of a slide in the stock market. But if you don’t invest enough, it means you won’t benefit from the great long-term returns of stocks.

Think about holding around 60% of your investment pot in stocks, Alexander Green in Investment U explains.


Step 2: Use position sizing in your investment strategy


When it comes to your stock holdings, you need to limit how much you put into each position.

A good rule of thumb is never to invest more than 4% of your portfolio is one stock. This helps to lower your stock specific risk.

By using a 4% position size along with a 25% trailing stop loss, you limit your overall potential loss to 1% of your stock portfolio.


Step 3: Use trailing stop losses as part of your investment strategy


The great thing about trailing stop losses is they give you unlimited upside potential, but strictly limit your downside.

A good rule of thumb for a trailing stop loss is to use 25%. This means if a stock falls more than 25% from the price you bought at or its high, you sell.

This protects your investment capital and your profits. It’s the perfect exit strategy.

So there you have it. Your three-step action plan for successful investing.

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Your three-step action plan for successful investing
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