There are a few good reasons why most professional well known portfolios do not go over 5% of exposure on any given stock. Algorithm and long term statistical data point to a specific way to preserve your capital and balance your risk reward variable.
Below are some of the rules that helped me generate around 20 % annual return for the last few years.
- Rule number one : do not have more than 5% exposure on any given stock.
- Rule number two: do not have more than 20 % exposure on any given sector ( example Energy)
- Rule number three: Do not fall in love with a growth stock. If this stock goes from 5% of your portfolio to 15 % in 2 years, be disciplined and sell some of it to put the exposure back to 5%. And proceed to buy another stock with the capital gain.
- Rule number four: Embrace major pull backs, if one of your stock plunges 40 % in 8 weeks because of non sense short term fears, buy more of the stock. Chances are the stock will rebound and you will make more money over the long run.
- You do not need to read to much specialized media, it will probably make you sell a stock at the wrong time and remember those websites want to sell subscriptions and publicity ads. Concentrate on the balance sheets of the companies you are holding.