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
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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