My 50 / 20 Investing Rule

I am no where near an investing professional of any sorts, I have always been and will always be small time when it comes to the stock market. However, the buying and selling of individual stocks is something I have always enjoyed and will continue to do as my personal finance situation allows.

Over the years I have read many books, listened to many experts and devised numerous investing formulas that usually didn’t pan out. My problem is that I would get emotionally tied to a stock - meaning if it went up I always thought it could go up more and if it went down I always thought it would go back up. This strategy I followed for most of my investing life has resulted in some good gains and some awful loses. A few months ago I decided to scrap my existing investing strategy and try something new - what I call the 50/20 Automatic Investing Rule. The basic premise, and I do mean basic, is that if a stock goes up 50% I sell and if it goes down 20% I sell. However the key part of this, considering my investing history, is that it is an automatic process, not manual. The reason for it being automatic is two-fold, first I don’t have time to sit and watch a stock ticker all day and secondly it removes the temptation to see how high it will go.

So why 50/20? I would love to say it is based off of a complicated algorithm…but of course it isn’t. Basically I took my investing history and the charts of the stocks I have always been watching and combined that with my own comfort level. A 50% return on investment anyone would be happy with and I can live with a 20% decline. Keeping in mind we are dealing with 4 figures, selling at a 50% ROI isn’t going to make you rich…at least right away. If you keep to this strategy and of course keep more on the up 50% rather than the down 20% you can accumulate some serious bank over time.

Here is an unrealistic example that doesn’t take into account losses or the actual task of finding stocks that give a 50% return each time. But, it does show how to go from a little to a lot.

Starting with $1,000…

$1,000
1 $1,500
2 $2,250
3 $3,375
4 $5,063
5 $7,594
6 $11,391
7 $17,086
8 $25,629
9 $38,443
10 $57,665
11 $86,498
12 $129,746
13 $194,620
14 $291,929
15 $437,894
16 $656,841
17 $985,261
18 $1,477,892
19 $2,216,838
20 $3,325,257

Now of course there are exceptions to the rule - penny stocks, stocks that give a good dividend or ones you are SURE will go up 500% by the end of the year

Bottom line is avoid being greedy and try not to lose your shirt.

Tagged as: Finance, Investing, Money