The Three Foundations of Wealth

Hello. Brian Hunt here.

I’m the CEO of InvestorPlace.

And if you’ve been an InvestorPlace customer for a while, you’ve seen my name on dozens (maybe hundreds) of emails, research pieces, and promotional messages.

I try to stay in touch  because I love this business. I love helping people achieve their financial dreams.

I love creating investing services that help people make great financial decisions, increase returns, and avoid big losses.

However… there’s something about my industry that drives me crazy.

It makes me feel like my colleagues and I are doing you a grave disservice.

I feel like I’m letting you down.

Before you go on, you should know there’s a powerful reason why I’m bringing up this issue.

For some people in my industry, it’s controversial. But it’s something that could help you drastically shorten the time it takes to achieve even the biggest financial dreams.

There’s a huge payoff for you at the end.

But first, let me tell you about one of my industry’s greatest failures… a way in which we’ve let a lot of our customers down.

The Great Distraction

The marketing… the incessant marketing.

It’s the biggest complaint the financial research industry hears about every day.

The marketing.

I’ll be the first to tell you that I don’t like how our industry markets.

There’s too much hype for my taste. There’s not enough “getting right to the point” for my taste.

However, the simple reason our industry does it this way is because that’s the kind of marketing that works best.

That’s the kind of marketing that generates the best response in the marketplace.

It’s what draws the greatest level of interest.

So, that’s what the financial research industry uses.

As some people in our industry say, “If the customer wants to complain to someone about our marketing style, he should discuss it with the mirror.”

But when it comes to our marketing and the products we deliver to customers, I believe we’re making a huge mistake.

I believe all the time and focus the financial research industry places on “single stock ideas” is a disservice to its customers.

It’s a distraction from what REALLY matters to your success as an investor.

I believe all the time and effort the financial research industry places on “single stock ideas” willfully ignores more important issues and promotes financial illiteracy and wealth inequality.

I’m sure you’ve seen dozens of our pitches…

“This tiny drug stock could explode after Phase 3 trial results are released!”

“This stock could rise 400% as Apple orders more and more of its special technology!”

“This 5G stock could soar as its technology is rolled out all across America!”

What can I say?

People love a good stock story (myself included).

People love to bet on individual stocks with big potential.

People like those stories so much that our industry places a huge amount of focus on them.

We obsess over finding and selling stock picks, stock picks, stock picks.

Again, our industry finds that is what works best.

While I’m not proud of how we market, I won’t apologize for it.

I won’t apologize for what our customers want.

Still, I believe investors are making a big mistake by spending so much time and focus on individual stock ideas.

This brings me to our greatest failure…

… and how we can make our greatest improvement in our service to you.

Every great investor knows that individual stock picks are a relatively small factor when it comes to achieving investment success.

Really great investors know that obsessing over individual stock picks at the expense of more important things is an amateur move… a chump move.

You see this concept emphasized over and over and over in the greatest investment books…

You hear it over and over in interviews with legendary investors…

And if you work with great investors, you hear it over and over directly from them.

Obsessing over single stock picks is a fool’s game.

It will hold you back and increase the time it takes for you to achieve your financial goals.

Obsessing over single stock picks is one of the hallmarks of financial illiteracy.

However, many investors spend most of their time and energy on individual stock ideas, so there’s a good chance you’re making this mistake.

I’m sorry you had to hear it from me.

But I care about your success, so I’ll give it to you straight.

I don’t want to see you end up yet another victim of the Wall Street machine or our own psychological pitfalls.

I want to see you achieve money mastery.

I don’t want to the Wall Street system take advantage of you.


If focusing lots of time and effort on stock ideas is a fool’s game, what should we be focusing on?

What do investment masters spend most of their time and energy on?

What separates the rich from the poor?

If stock ideas don’t make the difference, what does?

Here’s where my industry is failing you…

There are three really important factors in your success as an investor. These are the big move-the-needle things we should all be obsessing over.

They are…

 These are BY FAR the most important factors in your success as an investor.

 The world’s most successful investors – the truly wealthy – say this over and over again.

These are the secrets of success the rich have used for centuries.

These are the concepts you must master if you want to achieve lasting success as an investor or trader.

These are the concepts that separate the haves from the have nots.

These are the concepts that will make you financially literate and take you to “master” level.

The vast majority of your time and energy as an investor should be spent learning and applying these superpowerful ideas.

Yet… when you look at the totality of my industry’s promotional materials and research products, you’ll see that material on asset allocation, position sizing, and position management makes up less than 1% of our work and effort.

It’s a pathetically small amount of material…


It’s a pathetically small effort to educate people on what really matters when it comes to succeeding as investor.

So, indirectly, our industry is encouraging financial illiteracy.

It’s encouraging people to act like idiots with their hard-earned savings.

It’s encouraging people to be on the wrong end of the haves and the have nots.

It’s enough to make me want to scream.

It’s like we’re a health and wellness center and, instead of devoting our time and energy to extolling the virtues of healthy eating, quality sleep, and exercise (the critical, foundational ideas), we are devoting the bulk of our time and energy to telling people which kind of protein shake we like best (a less-than-critical idea).

Sure, protein shakes can be an important part of maintaining your health. But… but when it comes to helping you achieve maximum health, they’re not even in the same solar system of importance as sleep, diet, and exercise.

It’s a distraction from what really matters.

We need to do better.

We need to help people focus on what really matters.

Now, many of my colleagues say…
Brian, just give customers what they want.

Don’t try to educate anybody.

Don’t try to get people to eat their vegetables and go to the gym.

Most people are lazy and undisciplined.

They won’t put in the work.

They don’t want to learn.

Just sell them sugary desserts and stand aside as they choose to be ignorant and travel on the path of self-destruction.

That’s how a lot of people in the investment research business approach it.

They don’t believe people will listen to reason.

They don’t believe people will put the work in and act with discipline.

They say the wealth gap exists because people are lazy and undisciplined and fall prey to psychological pitfalls.

And they’re not going to change… you’ll just come off as a nag.

This all might be true for some people.

But I believe you’re an InvestorPlace customer because you truly aspire to learn and grow and succeed.

You aspire to be (or remain) a “have” instead of a “have not.”

You prefer to live in the light, not the dark.

You want to be a money master, not another victim of the Wall Street lawnmower.

If this describes you, let’s discuss what are BY FAR the three most important factors in your investment success.

Let’s discuss what it means to be truly skilled with money instead of yet another chump who Wall Street milks like a cow.

The Foundation of Every Solid and Successful Portfolio

With that intro out of the way, let’s talk about the importance of a strong foundation.

If you’re a parent or grandparent, I’m sure one of your greatest goals is making sure your children or grandchildren have strong character foundations.

You want to see them treat people with respect… to have a strong worth ethic… and to have resiliency in the face of adversity.

If someone does not have a strong foundation rooted in those important character traits, they’ll likely struggle in life.

That strong foundation is critically important.

Or, take athletes. If they don’t have a strong foundation rooted in the fundamentals of a game, they are sure to struggle.

A strong foundation is critically important.

Or, take building a house.

You can have the best finishes and the finest furnishings in your dream house, but if the house is built on an unstable foundation, you’ve got a crappy, dangerous house.

You’ve got a disaster in waiting.

Those beautiful finishes and furnishings will end up in a heap.

A strong foundation is critically important in just about everything we do in life… including investing.

That’s what this s is about.

It’s about making sure you understand, master, and implement the things that really matter to your success as an investor.

As I mentioned earlier, the things that really matter are not individual stock picks.

What stocks you buy over your investment career is one of the least important factors when it comes to achieving investment success.

I want to see you win.

I want to make sure every InvestorPlace member has incredible financial knowledge.

I want to see you achieve your financial goals in record time.

The only way you’ll do that is by focusing on what really matters… and that’s the critical, foundational ideas I want to share with you in the rest of this educational series.


Let’s go back to that house analogy.

Let’s go back to the importance of a strong foundation.

Think of your investment portfolio as you would a house.

When it comes to wealth and investing, your portfolio needs to be built on a solid, sturdy foundation. The frame needs to be strong.

Image of the foundation and frame of a house

If you don’t have these two things, everything else is meaningless.

If you don’t have these two things, the house is destined to collapse.

A strong wind will knock it right over.

When it comes to wealth and investing, there are three major things that make up the foundation and frame of your “house.”

Once again, they are:

One, asset allocation.

Two, position sizing.

And three, position management.

In this special report, I will share a series of essays that will explain what it means to be truly skilled with money.

Let’s get started with the foundation of every solid and successful portfolio – asset allocation…

Foundations of Wealth Idea No. 1

Asset Allocation: How a Balanced Investment Diet Works

We’ve been discussing how in the financial research business “stock picking” gets most of the press.

People love to learn about interesting stocks with huge potential.

People love to talk about stock picks… about sector trends… about new and interesting companies…

They love that feeling of being “in the know” and showing off at the neighborhood barbecue.

The mainstream financial media constantly reports on individual companies and their stock prices.

However, when it comes to lasting investment success, asset allocation is 100 times more important than stock picking.

Asset allocation is the part of your investment strategy that dictates how much of your money you place in broad asset classes.

Over the course of your career as an investor, asset allocation will have a MUCH greater impact on your wealth than stock picking will have.

The ratio will be at least 100 to 1.

Because many individual investors spend their time studying and investing in individual stocks, they don’t spend any time learning what sensible asset allocation is.

This leads them to take crazy risks with their retirement savings.

The most important aspect of asset allocation is using it to diversify your holdings across stocks, real estate, cash, bonds, commodities, gold, insurance, private businesses, and other financial vehicles.

Intelligent asset allocation is like having a “balanced investment diet.”

image of a balanced diet

Ideally, you want a diversified mix of assets that greatly limits your exposure to a big decline in one asset class.

Intelligent asset allocation means you DON’T bet the farm on a single stock or even a single asset class.

For example, there’s the story about the catastrophic losses suffered by Enron employees.

In the late 1990s, Enron was considered the world’s most innovative company. Its executives were the superstars of corporate America. So, some Enron employees placed all their retirement savings in Enron stock.

Their asset allocation was “100% Enron.”

When Enron was revealed as one of the biggest frauds in American history, its stock went to zero. The employees who bet the farm on Enron were wiped out.

These people used absolutely horrible, incredibly risky asset allocation.

Enron headlines

Or consider Americans who went “all in” on real estate in 2005 and 2006.

Back then, real estate mania was in full force. Real estate was considered a “can’t lose” bet. So, many people put all their savings into real estate… and even took on loads of debt to “leverage” their returns.

When the real estate market crashed, these “all in” real estate players were wiped out.

Foreclosure sign

Source: iStockphoto

At the heart of their downfall was absolutely crazy asset allocation.

They bet the farm on one asset class… and it was in a bubble.

If you keep a huge portion of your wealth in a single asset class – whether it’s stocks, bonds, oil, gold, real estate, or whatever – you leave yourself exposed to a large decline in the value of that asset class.

You make yourself financially “fragile.”

You can leave yourself exposed to what happens with just one business, one stock market, or one asset class.

Given the big risks that going “all in” on one stock or one asset class presents, it makes great sense to diversify your wealth.

Think of it like eating a balanced diet.

You want to include options from different food groups. Taken together, a mix of things helps you achieve maximum health.

Some Assets “Zig” When Stocks “Zag”

As measured by the S&P 500 index, the average return of U.S. stocks is about 10% per year for the last century.

This average return beats gold, oil, bonds, cash, and every other widely traded financial asset on the market.

Stocks produce excellent long-term returns for a simple reason: The U.S. system of free enterprise leads to tremendous wealth creation. It gives life to value-creating businesses like Apple, Ford, Starbucks, Home Depot, Coca-Cola, Boeing, and Microsoft.

Free people and free markets create goods and services that people want to buy – and wealth follows.

Investors go along for the ride.

Given the stock market’s long track record of success, it’s no wonder many people are interested in stocks.

However, the high returns you can earn in stocks come with a trade-off…

Stocks are more volatile than bonds and many other assets. From time to time, stocks experience big declines in value (aka “bear markets”).

For example, when the tech stock bubble burst in 2000-’02, the benchmark S&P 500 index declined by 49%.

During the bear market accompanying the Great Recession of 2007-’08, stocks fell an incredible 56%.

These two recent examples show that while stocks can generate excellent long-term gains, they also can inflict serious short-term pain.

That risk is more than many people can afford.

And no crisis-proof “hardened” portfolio should decline in value by 56%.

Fortunately for investors, some assets “zig” when stocks “zag.”

They do well even when the stock market is struggling.

After all, the world is a big place.

The menu of assets investors can own is large and varied.

There’s rental real estate. There’s farmland. There’s timberland. There’s gold and government bonds.

There’s municipal bonds and corporate bonds. There’s cash, commodities, collectibles, and currencies.

There’s private business.

And, of course, there’s cryptocurrency, such as Bitcoin.

Different economic climates affect the price of these assets differently.

For example, in 2007, stocks began to decline in advance of the Great Recession.

As the crisis began to take hold, the  broad market fell 51.7% from its 2007 high to its 2009 low.

During that terrible period for stocks, gold – traditionally considered a “safe haven” asset – gained 27.8%. You can see this big difference in returns in the chart below:

Chart of gold vs. stocks

During the same rough period for stocks, government bonds – another traditional safe haven – climbed about 18%.

You can see this big difference in returns in the chart below:

chart of bonds vs. stocks

Or consider what happened during the 2000-’02 bursting of the tech bubble and the subsequent bear market in stocks.

During this brutal time for investors – where technology stocks lost over 70% of their value – corporate bonds returned 9.3% in 2000… 7.8% in 2001… and 12.1% in 2002.

Real estate also did well during the tech meltdown.

The S&P Case-Shiller U.S. National Home Price Index increased 27% from Jan. 1, 2000, through the end of 2002.

You see these kinds of divergent returns across asset classes over and over and over throughout history.

Because different economic climates affect different businesses and asset classes differently, some assets “zig” when stocks “zag.”

That’s why an investor focused on building and maintaining wealth will own a diversified mix of assets.

To be clear, there’s no “one size fits all” asset allocation strategy that is right for everyone.

When you (possibly with the help of a financial adviser) think about your right “mix,” you must consider your age, your risk tolerance, and your goals.

A 45-year-old who wants to pay college tuition for three children will think about asset allocation much differently than a 28-year-old with no kids.

And a 28-year-old with no kids will think about asset allocation differently than a retired 75-year-old.

Whatever asset allocation mix you choose, just make sure you’re not at risk of being wiped out by a crash in a single business or asset class.

Your second tool – position sizing, which I’ll tell you about next – will increase it even more…

Foundations of Wealth Idea No. 2

Position Sizing: How Much You Buy Matters More Than What You Buy

In my last essay we talked about asset allocation – how it’s important to have a diversified mix of assets.

Different economic climates affect different businesses and asset classes differently, so some assets “zig” when stocks “zag.”

That’s why an investor focused on building and maintaining wealth will own a diversified mix of assets.

In this essay, we’ll discuss why how much you buy matters more than what you buy.

Let’s start with a common example…

You learn about a company with major growth potential.

The upside is more than 500%.

So, you buy a lot of the stock. You want to truly capitalize on the opportunity.

And then, things don’t work out.

The company doesn’t execute.

Instead of its market value soaring 500%, its market value falls 50%.

You’ve lost way more money than you’re comfortable losing.

It’s an embarrassing and painful experience.

This is where smart position sizing comes in.

It’s the great preventer of unacceptably large financial losses.

Position sizing is the part of your investment strategy that dictates how much of your investable assets you will place in any single investment or trade.

For example, suppose an investor has a $500,000 net worth.

If this investor buys $5,000 worth of a business, his position size would be 1% of his total capital.

If the investor buys $50,000 worth of the business, his position size is 10% of his total capital.

If the investor buys $200,000 worth of the business, his position size is 40% of his total capital.

Many folks think of position size in terms of how many shares they own of a particular stock or investment.

But smart investors think in terms of what percentage of their net worth is in a particular holding.

Position sizing is one of most important ways you can protect yourself from a “catastrophic loss.”

That’s the kind of loss that erases a huge chunk of your net worth…. that ends careers and ruins retirements.

Most catastrophic losses occur when an investor takes a much larger position size than he should.

He’ll find a stock he’s really excited about, he starts dreaming of the potential profits, and then he makes a huge bet.

He’ll place 20%, 30%, 40% or even 100% of his account in that one idea.

He’ll “swing for the fences” and buy 2,000 shares of a stock instead of a more sensible 300 shares.

When the investment doesn’t work out, he gets killed.

Man stressed over financial losses

An investor who starts with $100,000 suffers a catastrophic 80% loss is left with $20,000.

It takes most people years to make back that kind of money.

But there is indirect damage that often is worse than losing money.

It’s the mental trauma of taking such a huge loss… and feeling like a failure.

Some people never recover from it.

They see years of hard work and savings flushed down the toilet.

money getting flushed down the toilet.

Most world-class investors say never to put more than 10% of your account into any one position.

Some professionals won’t put more than 5% in one position.

Seasoned investors vary position sizes depending on the particular investment.

For example, when buying a safe, cheap dividend stock, a position size of up to 3% may be suitable.

Some managers who have done a lot of homework on a stock and believe the risk of a significant drop is tiny will even go as high as 10% or 20% – but that’s more risk than the average person should take on.

If you’re investing money into a startup business, a speculative stock, an option position, or anything else that is on the riskier end of the spectrum, the answer to “How much can I lose?” should be “Every single dollar.”

That’s why speculative situations are best played with tiny amounts of your capital.

Or, if you’re a conservative investor, not played at all.

But… let’s say you just have to invest in a speculative situation.

Let’s say you’re buying a speculative biotech stock or a speculative tech company with just one potential “big hit” product.

With speculative investments, there is always the possibility that you could lose 100% of your money.

So, you want to use a tiny position size.

Generally, you don’t want to place more than 0.5% or 1% of your net worth portfolio into a speculative investment. That way, if the situation works out badly, you only lose a little bit of money.

You certainly don’t want to put 5% or 10% or 25% of your net worth into a speculative investment. It’s way too risky.

Unfortunately, most novices will risk three, five, or 10 times as much as they should in speculative investments.

It’s a recipe for disaster.

If the investment doesn’t work out as planned or if the broad stock market suffers a big correction, a big position in a speculative investment causes a big hit to a person’s wealth and confidence.

When in doubt, always dial down your position size.

It will help you follow Warren Buffett’s most important rule (don’t lose money)… and it will help you avoid catastrophic losses.

When you start as an investor or trader, you’re as bad as you’re going to get.

So, take the advice of legendary trader Bruce Kovner and “under trade, under trade, under trade.”

Make much smaller investments than your emotions want you to make.

Make small investments to get the hang of things.

If you have $10,000 to get started as an active investor, set aside $7,000 and invest with $3,000 for the first six or 12 months.

But even after going through a training period like this, it’s tough to learn not to lose money unless you actually feel the pain of losing a lot of money.

In summary: If you want to build your investment portfolio on a strong foundation, you must learn how to win big by betting small.

Focus on using smart position sizing to avoid a catastrophic loss.

Next, I’ll describe how these two elements come together in our third Foundation of Wealth…

Foundations of Wealth Idea No. 3:

Position Management: Have a Plan and Stick to It

So far in this report, we’ve discussed the importance of asset allocation (the mix of assets you buy) and position sizing (how much you buy).

In this essay, we’ll talk about how – before you buy anything – you should have a plan for how you’re going to manage that investment.

You get in your car and head to the supermarket.

You have to pick up groceries for dinner.

After you get on the road and pick up speed, you go into a panic…

… because you just noticed there’s no brake pedal.

You have no ability to stop or slow the vehicle.

Then, you panic even more when your steering wheel locks up.

You have no ability to steer the car.

Now, you’re in a car with no brakes and no functional steering wheel. You’re in motion and in danger.

Of course, this wouldn’t happen in real life.

But this bizarro situation is how most people manage their investment portfolios.

It’s how most people manage their stock and option trades.

They get into investment and trading positions with high hopes and a destination in mind, but no ability to manage the positions once they are live.

The way most people trade and invest is the equivalent of the driver with no ability to change direction or stop the car.

No plan and pure panic.

Pure financial illiteracy.

As we covered earlier, the vast majority of investors focus on investment entries.

They focus on what to buy. They focus on stock picks.

However, the decision to enter an investment or trade is just one small part of that financial undertaking.

We covered how position sizing is a big part of investing: How much money you’ll allocate to an investment or trade.

Our third big – and, sadly, underappreciated – Foundation of Wealth is “position management.”

It’s how you’ll steer the car and adjust its speed while it’s on the road.

This is how money masters build their wealth.

For example…

If you buy a stock you believe has the potential to triple in value but instead it sinks 22% in value, what will you do?

If you buy a stock that soars 50% right after you buy it but then declines back to your purchase price, what will you do?

If you buy stock in a company with a highly respected CEO at the helm and that CEO steps down, will you sell the stock?

If you buy a stock that rises 100%, what kind of plan do you have to preserve that solid gain?

These are the questions successful veteran investors ask before entering any investment. This is the kind of planning skilled investors and traders do as part of their process. They give exit planning at lot of thought.

Unskilled, undisciplined investors barely give this planning a second thought.

They put large amounts of their hard-earned savings at great risk by entering investments and trades while having no exit plan.

No exit plan in case the stock heads 20% lower after the purchase.

No exit plan in case the stock rises 100% after purchase.

No exit plan in case the stock rises 20% and then drops back down to the purchase price.

It happens every day the stock market is open.

And it’s totally crazy.

As you might expect, the world’s best investors and traders – the “haves” – give exit planning a lot of thought. They know in advance what they will do if a stock or trade soars in value. They know in advance what they will do if a stock or trade sinks in value. They plan ahead.

Instead of acting like the financially illiterate investor that is flying down the road with no brakes and no steering, smart investors create a plan in advance… and they stick to that plan.

For a lot of great investors and traders, a key part of that plan is a powerful financial tool called a stop-loss order.

A stop-loss is a predetermined price at which you will exit a position if it moves against you.

It’s your “say ‘uncle’” point.

It’s when you say, “Well, I’m wrong about this one, time to cut my losses and move on.”

Most people use stop-losses that are a certain percentage of their purchase price.

For example, if an investor purchases a stock at $10 per share, he could consider using a 20% stop-loss.

If the stock goes against him, he would exit the position at $8 per share… or 20% lower than his purchase price.

If that same investor uses a stop-loss of 25%, he would sell his position if it declined to $7.50 per share, which is 25% less than $10.

Generally speaking, a stop-loss of 5% is considered a “tight stop-loss” – one that is close to your purchase price – and a 50% stop-loss is considered a “wide stop-loss” – one that is a long way from your purchase price.

Stop-losses can work hand in glove with position sizing to greatly increase your odds of success in the markets.

To get these two powerful tools working together, we need to become familiar with something we call “risk level.”

Your risk level is the amount of money you will “risk” on any one given investment.

It can serve as the foundation of all your position-sizing and position management (or .

For example, let’s say there’s an investor named Steve with a $100,000 account.

Steve believes Company ABC is a great investment and decides to buy it at $20 per share.

But how many shares should he buy?

If he buys too many, he could suffer a catastrophic loss if an accounting scandal strikes the company.

If he buys too little, he’s not capitalizing on his great idea.

Here’s where intelligent position sizing comes into play.

Here’s where the investor must calculate his risk level.

RL is calculated from two other numbers.

One is total account size.

In this case, it’s $100,000.

The other number is the percentage of the total account you’ll risk on any given position.

Let’s say Steve decides to risk losing 1% of his $100,000 account on the position.

In this case, his risk level is $1,000.

If he decided to dial up his risk to 2% of his entire account, his risk level would be $2,000.

If he was a novice or extremely conservative, he might go with 0.5%, or a risk level of $500.

Steve is going to place a 25% protective stop-loss on his Company ABC position.

With these two pieces of information, he can now work backward and determine how many shares he should buy.

Remember… Steve’s risk level is $1,000, and he’s using a 25% stop-loss.

To calculate how large the position will be, the first step is to always divide 100 by his stop-loss.

In Steve’s case…

100 divided by 25 results in 4.

Now, he performs the next step in figuring his position size. He takes that number – 4 – and multiplies it by his risk level of $1,000.

4 times $1,000 is $4,000.

That means Steve can buy $4,000 worth of Company ABC stock… or 200 shares at $20 per share.

If Company ABC declines 25%, he’ll lose $1,000 – 25% of his $4,000 – and exit the position.

That’s it.

That’s all it takes to combine stop-losses and intelligent position sizing to limit risk.

Here’s the calculation again:

100 divided by your stop-loss equals “A.”

“A” multiplied by “risk level” equals position size.

Finally, position size divided by share price equals the number of shares to buy.

Now… what if Steve wants to use a tighter stop-loss – say, 10% – on his Company ABC position?

Let’s do the math…

100 divided by 10 equals 10.

10 multiplied by $1,000 equals $10,000.

$10,000 divided by the same $20 share price equals 500 shares.

You can see that using a tighter stop-loss with the same risk level allows Steve to buy a larger number of shares, while risking the same amount of his total account… $1,000.

Next, let’s say Steve wants to use a super-tight stop-loss of just 5% on his position.

In this case, if Company ABC declines just 5% to $19 per share, he’s out of the trade.

This tighter stop-loss means he can buy even more shares.

Let’s do the math again…

100 divided by 5 equals 20.

20 multiplied by $1,000 equals $20,000.

$20,000 divided by the $20 share price equals 1,000 shares.

Again, a tighter stop-loss with the same risk level of $1,000 means he can buy twice as many shares and still risk the same amount of his total account.

As you can see, you can use the concepts of position sizing and stop-losses to determine how much of any asset to buy… from shares of Apple to shares of Home Depot or a commodity like copper or crude oil.

If you’re investing in or trading a riskier, more volatile asset, the stop-loss percentage should typically increase and the position size should decrease.

If you’re investing in a safer, less volatile asset, the stop-loss percentage should decrease and the position size should increase.

To be clear, you DON’T have to use stop-losses with your investments.

You can simply use no stops but small position sizes.

If you put on a $5,000 position with no stop-loss, you’re taking on the same amount of risk as if you put on a $10,000 position with a $5,000 “stop.”

You’re risking $5,000 either way.

Many professionals combine no stops and small position sizes with riskier, more volatile investments, like private companies, microcap stocks, options, and cryptocurrencies.

We could spend a lot of time going over different kinds of exit plans for different kinds of investment outcomes.

But we want to keep things quick and simple for right now.

We want to focus on the core, foundational idea: Have an exit plan… and stick to it.

The best thing about exit planning is that it leads to higher quality decisions than “winging it” does.

Managing your money is stressful. After all, it’s your hard-earned savings and financial freedom on the line.

We all know the decisions we make under stress are likely to be of lower quality than the decisions we make when we’re relaxed.

When we are in a big hurry or when we’re angry or dealing with a traumatic event, the rational part of our brain doesn’t work as well. It can even seize up and put us in a frozen state.

Now throw in the stress of managing our money.

Do you really want to “just wing it” when it comes to these critical decisions?

Do you want to make up your plans on the fly when you’re rushed and under a lot of stress?

I didn’t think so!

It’s a no-brainer.

It’s a no-brainer to have a preplanned exit strategy for every investment or trade.

I can’t state this emphatically enough…

Creating an exit plan for every investment and trade you make is a major difference maker in your financial life.

It’s one of the major things that separates the financially literate from the financially illiterate.

The financially illiterate are prone to “winging it.”

Most of the time, they buy investments or enter trades with no exit plan.

Their decision making is pure chaos. There’s no plan and there’s no rhyme or reason. The just make it up as they go along.

This leads to a lot of low-quality decisions made during times of stress.

But don’t take it from me… take it from one of the most stressful pressure-cooker jobs on the planet: Being an NFL head coach.

Being an NFL head coach during a big game is one of the most stressful activities on the planet.

There are many millions of dollars on the line.

Millions of people are watching and scrutinizing every move you make.

You’re working with extremely competitive, extremely aggressive people who are also under stress.

And during games, coaches must make big decisions with very little time to think about them.

It’s an intense mixture… a real “stress cocktail.”

Given the stress of coaching an NFL game and the complexities involved, it’s no surprise how head coaches are HUGE on preplanning.

This is a massive thing every coach learns early on in their career…

Have a plan for every kind of situation. Know in advance what you will do. There’s a lot on the line, so for goodness’ sake, don’t “wing it.”

During every game, coaching staffs have on-hand big lists of potential situations they could face, plus the preplanned moves they will make in those situations.

They know what they will do in each situation before it even happens.

After all, it’s nearly impossible to make great decisions on the fly and in a hurry… when so much is on the line.

There’s too much on the line to “wing it.”

For example, if you’re down by 4 points, 40 seconds are left on the clock, and you have the ball at the 50-yard line, what do you do?

Coaches have a plan for that.

The team has practiced what it will do in that situation.

Or, if a team is up by a point after scoring a touchdown in the fourth quarter, do they kick an extra point or go for a two-point conversion?

Coaches have a plan for that.

They’ve done the math and created a strategy in advance.

They don’t wing it. There’s too much on the line to wing it.

Managing your money is no different.

Your money is too important to “wing it” with your investments and trades.

Give yourself the advantage of knowing what you’ll do in a given situation in advance. Give yourself the advantage of higher quality decisions… made with plenty of time to think and when you’re in a calm state.

I know exit planning isn’t as exciting as buying a microcap stock with major potential or making a bet on a new industry that could explode in size…

But this is the stuff money masters spend their time and focus on.

This is the stuff that truly matters.

This is what the financially literate focus on.

This is what ensures your portfolio is built on a solid foundation.

If you don’t spend time on this part of your investing or trading, then you’re not serious about achieving success.

It’s that simple.

If you’re not ready to spend time and energy on position management, you’re not ready to win… and you’re choosing to be financially illiterate.

You’re choosing to put yourself in the position of driving that car with no brakes and no steering.

The people who are serious and willing to put in the work will eat your lunch.

With these three Foundations of Wealth in your pocket, your portfolio will have the stability to survive the worst financial storms…


By now, I hope you see that spending most of your time and energy on single stock ideas is an amateur move.

It will hold you back and increase the time it takes for you to achieve your financial goals.

Obsessing over single stock picks is one of the hallmarks of financial illiteracy.

Instead, I hope you focus on what really matters: Building and maintaining a strong financial foundation.

To do so, become a master at our three Foundations of Wealth:

Those are the parts of your investment strategy that will move the needle.

Those are the things the financially literate focus on.

These are by far the most important factors in your success as an investor.

These are the concepts you must master if you want to achieve lasting success as an investor or trader.

These are the concepts that separate the haves from the have nots.

Our three Foundations of Wealth are what will take you from financially literate to the “money master” level. The majority of your time and energy as an investor should be spent learning and applying these super powerful ideas.

Your success is important to us.

And I don’t mind sharing that there’s some self-interest here on my part. I won’t deny that.

The way I see it, the more of your investment or trading gains you retain and the more losses you keep small, the more money you’ll make and the better your experience in the markets will be… and the more likely you’ll be a longtime InvestorPlace reader.

We hope to play a role in helping you achieve your financial dreams as quickly and as safely as possible.

We’ll be there every step of the way.

Thanks for being an InvestorPlace reader.



Brian Hunt

Article printed from InvestorPlace Media,

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