You’ve been told your entire life not to put all your eggs in one basket.
But when it comes to their money, investors often ignore this wisdom.
According to a study by the U.S. Securities and Exchange Commission (SEC), most Americans can’t correctly answer basic financial literacy questions… including how to manage portfolio risk.
From the report:
Low levels of investor literacy have serious implications for the ability of broad segments of the population to retire comfortably, particularly in an age dominated by defined-contribution retirement plans.
Translation: “If you want a stress-free retirement, you need to take control of your financial future.”
And you can’t do that without basic financial literacy.
That’s why you turn to us here at PBRG. We guide you on the path to sustained financial prosperity.
So today, I’ll share our risk-management strategy with you – and show you a simple way to calculate how to weigh your risks.
Practicing it will put you ahead of 99% of investors.
A Pillar of Wealth-Building
At PBRG, risk management is a key pillar of our wealth-building strategy. After all, you can’t build wealth if you’re losing money.
So Daily editor Teeka Tiwari uses several methods to mitigate risk, including stop losses and making asymmetric bets through small position sizes.
When it comes to position-sizing, his simple rule of thumb is this…
If an investment hits its stop, your maximum loss should be no more than 2.5–5% of your portfolio’s value.
Here’s how it works…
Let’s say you have $20,000 earmarked for trading. And you get a tip on a high-quality stock you want to buy at $20 per share with a 20% stop loss. How many shares can you buy?
Well, you first need to figure out how much you’re willing to risk.
Let’s assume it’s 5%… Five percent of $20,000 is $1,000. That means if you get stopped out of the idea, you can afford to lose no more than $1,000. And if you’re buying the investment at $20 with a 20% stop, that means your stop price is at $16.
So your stop-loss size is $4 (the difference between $16 and $20).
This means you can buy 250 shares ($1,000 divided by the stop loss of $4 = 250 shares).
A Simpler Way to Calculate Risk
Position-sizing is one of the most important concepts Teeka learned from his career as a Wall Street executive and hedge fund manager. As he says:
Position-sizing is critical to your success in the markets. By using this simple technique, you’ll never blow up your portfolio with one bad investment.
That’s why each of his recommendations comes with position-sizing guidelines you can stick to. These are great… especially if you find yourself wanting to “go big” on some speculative ideas (like cryptos).
Now, if you want a simpler way to calculate your own position sizes, you can try this free position-size calculator from Investment U.
Just enter the ticker symbol of the stock you want to buy… your portfolio’s value… how much you’re willing to risk… and the type of stop you want to use.
The calculator does all the rest…
The example below shows the number of Apple shares an investor could buy with a hypothetical $100,000 portfolio, a position size of 2.5%, and a trailing stop of 20%. Please note: This example is not a trade recommendation.
Source: Investment U
This is a must-have tool for every investor. I strongly recommend you bookmark it and use it before making your next trade.
Managing Editor, Palm Beach Daily
P.S. Teeka’s robust risk-management strategy is one of the reasons he’s been called America’s No. 1 investor. And he has the track record to back it up…
Since 2016, his flagship Palm Beach Letter has averaged 154% per year. That’s more than 10 times the S&P 500, even while it’s traded at record highs.
Now, Teeka’s putting his track record and reputation on the line once again, to reveal what he believes will be the No. 1 investment of the decade.
Teeka tells me that in all his time as a Wall Street exec… and his more than three decades in finance… he’s never been so convinced of an investment’s potential.