Never Go All In

Most people agree that you should never put all your eggs in one basket on just one stock. Diversification is not enough, though. If you own five stocks, and you want to buy one more with $10,000 in cash, you should not buy the new stock all at once with the whole 10K. You should buy it in three or four segments. One thing that I have seen happen many times is your new stock immediately drops in price as soon as you buy it. This could be for a number of reasons.

First, you might not have done your homework. It might be a bad stock. If you only spent $2,500 on your first buy instead of the whole 10K, your losses will probably be minimal.

Secondly, the whole stock market could be going down, and it is taking your stock with it even when it is okay. One example of this is ERX, the 3X energy ETF comprised of major oil companies and other stocks. It looked like it had formed a bottom around $40 per share during August of 2011 and the first half of September. Then, suddenly, it dropped to the low 30s and even below 30 during the last part of September and the first trading day of October. If you had just spent $2,500 on your first purchase of ERX, you could have bought the rest of your position after it went down 25%. Then, you would have made a lot more money with ERX when it came back along with the rest of the stock market in the next month.