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Five Ways to Outsmart Other Investors

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Why do investors chase hot money and hang on to losers?

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I've been counseling readers for more than a year to think long-term. My advice is to preserve your wealth by navigating the near-term chaos. Stifle the knee-jerk urges to buy or sell. If you succumb to the urge to follow the herd, the crowd will inevitably lead you down the wrong path. And probably at the worst possible moment.

Instead, follow these five strategies:

1. Position your portfolio.

Develop a portfolio structure you can live with -- such as the 50-40-10 allocation model my firm recommends in our monthly sister publication, The Money Map Report. That way you can take all sorts of economic contingencies into account, while still maintaining a steady course that emphasizes sound "safety-first" choices, portfolio stability, and high income. How much stability should you be looking for? The 50-40-10 model is typically 30% less volatile than the broader markets. But it can dramatically outperform the broader indices on the upside.

2. Limit your losses.


Invest no more money than you can afford to lose. This sounds simple, but you'd be amazed at how many of the thousands of investors I've talked with through the years still don't get it. They view themselves as "investors," when they've actually become "speculators." One Texas man I know lost half his wealth during the past two years. When I asked why he'd put so much money at risk, he shrugged and replied: "Because I could."

Get your strategy in place then pick specific investments that keep you within the guidelines you established. Focus on global stocks with high dividend yields. And make sure you include a healthy dose of energy, technology, and inflation-resistant holdings. Such stocks tend to blossom at the first signs of a real recovery -- just like they have after every other documented economic downturn in history.

And finally, always make sure to manage your risk. Limit speculative positions to 2% to 5% of your overall portfolio value. That way even a total loss in one holding won't be enough to eviscerate your portfolio.

3. Avoid surprises.

In my talks with audiences all around the world, listeners are often the most surprised to learn that successful professionals don't wake up with thoughts of how much money we can make each day. Instead, we think about two things from the time we get up until the time we go to bed: What's the most likely thing that could cause me to lose money today? And how can I avoid that?

In other words, concentrate on understanding what it is that you don't know. And then make sure to steer clear of that potential pitfall. It's an approach that helps you make better decisions. Don't swing for the fences and risk a strikeout each time you come to bat. Instead, make up your mind to go for much-higher-probability singles and doubles. Risk aversion should be your new mantra, especially now.
No positions in stocks mentioned.
Fifteen trades. All profitable. Since launching his Geiger Index trading service late last year, Money Morning Investment Director Keith Fitz-Gerald is a perfect 15 for 15, meaning he's closed every single one of his trades at a profit. And he did this during one of the most volatile periods for the U.S. stock market since the Great Depression. Fitz-Gerald says the ongoing financial crisis has changed the investing game forever, and has created a completely new set of rules that investors must understand to survive and profit in this new era. Check out our latest insights on these new rules, this new market environment, and this new service, the Geiger Index.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
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