This was one of the hardest lessons learned. My thanks goes out to Jim Cramer of "Mad Money".
I bet big on a hot stock, everyone loved it. What could go wrong?
Price of oil, Me in love with the stock, not knowing when to cut and run. Oh trust me, a very hard lesson to learn. Not to mention expensive.
One of the best things you can do to your portfolio is to diversify. Winners will offset your losers. We will describe a basic approach to this concept. Lets say you have $10,000.00, you should pick five sectors to diversify in. Lets go with Oil, retail, real estate, banking, and Technology. Five sectors that we will put in $2,000 each. In the below example, we have 5 market sectors, and we bought one stock in each sector for $2,000.00 each.
So above is a very basic concept that everyone gets; however I want to add in another sector that should be in this chart. It's called your "cash on hand". You need this, not only as a guarantee that you won't loose everything, but to have cash on hand to grab that great opportunity. Now there is many ways to handle this, you could sell 1/2 of your position, in that sector that your new opportunity is in and then buy. But your trade will have to execute, and cash claimed back in your account before you can buy. That may be 2 days later! Cash on hand, is very important. I can't stress it enough. There will be times where you will be cash poor, but always trim your profits as they go up. This keeps your 6th share of the pie, in your favor at all times. I try to maintain my positions similar to the chart below. Keep in mind, I am not suggesting any sector to invest in, just the percentages.