The Ultimate Guide on How to Build a Portfolio of Losing Stocks

The traditional behavior of rookie investors normally results in a portfolio of under performing stocks and unrealized losses.

How does the average rookie investor end up with a portfolio of losing stocks?  The following is scenario that typically plays out.  See if you can identify the potential problems with this stock trading system.

• You select 6 stocks that you feel do well.  No one picks three winners, except you.  The truth is that 2 stock will go up, 2 will do nothing and the last 2 will go down in a best case scenario.  At this point your overall portfolio is break even or a small profit or loss.
• You still think the stocks that you picked are good.  At the same time you want to make money in stock market.  You sell the stocks that is making money and keep the stocks that are not performing.  You can’t get your money back if you sell a under performing stock, it just needs time to come back.  A loss is not a loss until you sell.  You are making money in the stock market!  At this point you have 2 stocks losing money, 2 stocks doing nothing and some cash from the 2 that make money.
• You now pick 2 more stocks that you think are going to make you money.  If you are fortunate to pick stocks better than the rest of the market, you now have added to your portfolio one that makes money and one that under performs.  Your current portfolio is made of 2 stocks losing money, 3 that are under performing and one that is making money.  Once again, you are faced with decisions and you are investing to make money so you sell the stock that is making money and keep the others, they were good picks but need more time.  You now have 5 stocks not making money and cash from selling the one you sold.
• You now can only buy one stock with your cash.  You study stocks real hard and pick the one you are sure is going to make you money.  Statistics will prove that you didn’t.
• You now have a portfolio of stocks that are all under performing.

Summary

You are a good stock picker because you sold a few for profit.  The problem now is that you don’t have any more cash to pick more winners.  This is how the rookie investor ends up with a losing portfolio.

Lessons

1. Cut Losses Quickly - losses are losses - paper losses are the same as actual losses.  This is the most fundamental principle in stock trading that you have to master or your losses will eat all your profits.  A stock that drops 50% has to move 100% to get back to your purchase price.
2. Not all your picks are good - this goes with first principle.  Most investors have to pick 5 or more stocks before they find one that does real well.
3. Let your profits run - when you find that you picked a winner and it makes sense, sell some under performing stocks and add to your winner stock position.