Mike's 10 Must Follow Rules for Making Consistent Profits in the Stock Market

Rule #9: Asset Allocation

Closely associated with my Diversification Rule number 8, is my Asset Allocation rule. And, in an indirect way, this rule is a by-product of my Rule number 5 (the "Never Marry a Stock" rule).

Within most portfolios there will be more than one position... more than one stock. So, assuming you have a fixed amount of cash to invest into a portfolio, what is the maximum amount to invest in any one position?

My answer to this is easy... If I only have 5 positions, then I would invest 20% into each of the 5 positions (5 x 20% = 100%).

If I have 10 positions, my investment amount would be 10% in each position (10 x 10% = 100%).

And so on...

The reason I said this rule is a by-product of Rule 5, is that if you have the same amount invested in each position, you will tend to not have more of an emotional attachment to one stock over the other.

My corollary to this rule is my "Maximum Investment Rule". I believe it is too risky to own fewer than 5 positions in any portfolio. To do so invites a significant loss if one position suddenly plummets in price. Stop loss settings do not guarantee a floor. It is possible for a stocks price to fall straight through a stop loss when a catastrophe occurs. And... catastrophes do occur from time to time in the stock market. So, for me... a 5-stock portfolio is the minimum... 10 is better.

Continue to Rule #10, Timing the Market.