3 Investing Rules for NOT Losing Money in Stocks


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. Beat debt. Make money. Make your money work for you. Creating the financial future you deserve. Let’s Talk Money! Then I’ll reveal a simple investing strategy
that is so easy, you’re not going to believe it at first. We’re talking protecting your portfolio
today on Let’s Talk Money! Hey Bowtie Nation, Joseph Hogue with the Let’s
Talk Money channel. A special shout-out to all you in the nation,
thank you for spending a part of your day here. If you’re not part of the community yet,
just click that little red subscribe button. It’s free and you’ll never miss an episode. 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. 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. 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. 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. 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. 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. 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. Check out the video to the right for five
Vanguard funds I use for that core-satellite strategy. These are five funds you can buy for a simple,
stress-free portfolio of stocks, bonds and real estate. Don’t forget to join the Let’s Talk Money
community by tapping that subscribe button and clicking the bell notification.

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