One of the most common investing mistakes people make is in their trade allocations. This is especially true when they are going for home run type trades. Instead of investing a small amount and trying to turn it into a large amount, many investors invest a large amount, and it ends up turning into a small amount.
Just last week I got a call from an old high school friend named Brian. He was asking me about a penny stock that was rumored to be a takeover target.
He was talking about putting half of his trading account into this trade. I told him I would never put half of my account in one trade. I also told him I would look at it for him.
After I looked at the company and analyzed the trade, I told him that I personally wouldn’t make the trade in my own account. Brian said: “If you wouldn’t make the trade, I won’t make the trade.”
A few days after that conversation, I was talking with Paul Mampilly. We were talking about trade allocations, and how many hedge funds take small allocations and have them turn into a large part of the portfolio. On the other hand, many individual investors, like my friend Brian, take a large allocation and let it become a small part of the portfolio.
Which would you rather do: Take a big investment and have it become small, or take a small investment and have it become big?
Small Investments Can Make a Huge Difference
The obvious answer to the question above is the first option. No one wants one of their large investments to become a small one.
I can show you how an allocation of as little as 2% can still have a big impact on the total return of a portfolio. But you have to have patience and discipline. You also have to be willing to take some total losses if you are going to have really big winners.
I am not just talking about 100% and 200% winners. I am talking about investments that go up 10, 12, 15-fold and more.
To show you how this can work, I put together the following table. The table shows how you can take 2% allocations from a $50,000 portfolio and make a great return. You can even have three 100% losses and two 50% losses, and still enjoy great overall returns.