Question regarding the "Rule of 5"
 

so I totally get he theory... but follow me here... I maintain 6 months emergency cash.
I have a 401k (mutual funds) Account one
I have 2 + years income post tax $$ in vanguard funds... Account two
I have my 'investment' account... Account Three..... which i just reviewed against the rule of 5%.... what i found was since I only have 14 stocks in it.. the rule of 5.. cant apply.. so what to do? Buy more stocks to balance things out? or dont worry about it because my spread and available cash..already provides some safety?

BTW my stocks are a good mix of "Coffee house" stocks + a few drips and some Muni's... excluding my two gambles... FB and BPT I yield over 12% this year before dividends.. add in the two losers and I am under water...

You've stumped me because I'm not sure what you're asking.


The 5% rule just means you shouldn't have more than about 5% in any ONE single investment ---- regardless of what account they're in.


I have a buddy that would buy the same stock in his personal account - then he'd buy it in his IRA and again in his wife's IRA.... He just couldn't look at his money and think of it as all his... regardless of the names on the accounts. No amount of badgering by me could fix it. He suffered a LOT during the downturn of '08.

Forgetting the cash and other accounts.. Using a basic theoretical example..if i have a stock portfolio with 14 stocks... and 20K invested... then some HAVE to have more then 5% in them... do I buy an additional 6 and balance it out?

Ah ha --- no...... is the simple answer. This is a "guide" not a hard and fast rule and it's just to keep people from risking too much in one single investment. But now you just work to invest any new money to keep all in balance. It's like diversifying. You do that the best you can - but obviously - nobody can be perfectly diversified. You just think about it when making your choices.... Like I don't need 25% of my investments in OIL... etc. If you have 25% in oil - then you're next purchases need to be in something else.

These "rules" work better when you have more money invested. Their intent is to keep you from losing too much or being down too much. But if someone only has $2500 invested - it's pretty ridiculous to think they can stay at 5% AND be diversified. At 10K - they could then maybe be 10% per investment (1K) and have started to have some diversification. At 100K invested - now you're on your way to the 5% with 20 names and you should absolutely be diversified.

Even at my level - I can't always stick to the 5%... but I'm always aware.

Lately Apple has been killing me with their decline in share price but I'm still in the positive at 28.46%. So I opened up the little tab showing me when I purchased the shares and notice that my last purchase is down 19.26% while the rest of the shares still have a positive percentage gain. Is there a way to sell off those shares and take the loss while maintaining the positive shares in my portfolio? I recall Greg mentioning something like this but I am not quite sure if I understood Greg correctly. I haven't lost faith in Apple yet to want to sell all the shares but eliminating the shares with a loss I think would be a smart move for now. ANy opinions on this?

Posting from my phone.


Schwab has a check box you can check before any transaction that has tax lots factored in. But I'm not where I can read whether or not you can just sell shares with a loss first. U can always call your brokerage to ask questions like this.

Personally I'd hold till they report this quarter. I think their Christmas sales will be pretty strong. But that's just my guess.

Thanks for the response Greg. My curiousity got to me more than the desire to want to sell the negative shares. I just noticed the negative shares are what's affecting the overall performance by averaging down the positive shares value. This is in my Fidelity Rollover IRA account and I'm not sure I can sell just the poor performing shares without actually dealing with a broker in person.

Okay -- back from the pool now.... :unibrow:


Since you hold the stock in an IRA -- there's no provision for taking a tax loss... so unless you just don't like the stock - I'd hold it. I'd only sell if you had a TAXABLE account and wanted to do a year end "take some profits and offset some of that with a loss". But you can't do that in an IRA.

Remember that the day after you sell -- the stock will run 60 points. :willy:

..........you went down and so did the market.

Waiting for buddy dive pics. :unibrow: