The legendary investor Warren Buffett has two great rules for investing.  They are …

Rule 1:  Don’t lose the money.

Rule 2:  See rule number 1.

This is a huge key to successful investing.  So protecting your stock investments is probably one of the most important things you can learn and do.  This is how you make money and keep from having big losses.  You know, losses like you may have heard other investors have taken, or may have experienced yourself.

Now there are two main things you need to do to protect your portfolio.  And both are simple to understand.  So if you just do these two things, you will be way ahead of the average investor.

One technique is to strictly limit your losses (see http://livelearnandprosper.com/let-your-profits-run-and-stop-your-losses).

The other is to not put all of your eggs in one basket.  You’ve heard that phrase before, right?  Meaning that if you drop the basket, all of your eggs break.  So we’ll discuss this important thought in today’s post.

This is also known as diversification, and it means you should own a number of different stocks, and never invest all of your money in one single stock.  If you do, you are taking unnecessary risk, and could have a big loss.

Why?  Because none of us can predict the future.  And you never know if there will be a headline tomorrow that says something really bad just happened at that one company that you are invested in.

Like ENRON, for example.  There were people that had their entire retirement investment in this one company’s stock.  Then one day they woke up and there was a bad headline in the news about ENRON.  It said the management had been cooking the books and reporting profits that were completely made up.

The stock value dropped, plummeted, and lost half of its value in just one week.  And by the end of the scandal, and bankruptcy, the stock had dropped from $90.00 to $.61 a share.  That’s right, sixty-one cents.  It was a total wipeout.

So whenever you are tempted to put all your eggs in one basket, you might take a minute to read about the Enron scandal.  It’s a sobering and cautionary tale for all investors.  You can read about it here at https://en.wikipedia.org/wiki/Enron_scandal.

So be sure to invest in more than one stock.

How many stocks should you be invested in?  Opinions vary on this.  Most range from five to twenty-five different stocks.  And I think five is risky, because you still have 20% of your investments concentrated in a single stock.

Of course, you’ll probably have just a few stocks when you first start to build your portfolio.  So in the beginning, you will not be as diversified as you should be.  But work toward diversifying into more different stocks as soon as you can.  You should really shoot for having no more than 4-5% of your portfolio in any one stock.  So practically speaking, I tend to stay invested in 20 – 25 stocks.  That keeps my exposure to any single stock to no more than 4 – 5%.

Similarly, never invest in all of the same kind of stocks.  For example, it would not be smart to invest in J. C. Penney’s, Macys and Target.  Sure, you are invested in more than one stock, but they are all retail department stores.

So what happens to your account when there is a recession and consumers stop shopping?  All of your retail department stores stocks go down — all at once.

So invest in different kinds of stocks to stay diversified as well.  Which is really not hard to do if you have a steady stream of new stock recommendation ideas to consider (like the oxford communique, or the oxford income letter we’ll discuss in our next post on How To Find Good Stocks To Buy).

Because that stream of investment ideas, whether free or paid for newsletters, will help you be sure to stay diversified.  And this is a sign of a good stock investor.  It’s a good way to protect your investments.  And it puts you ahead of the average investor.

To learn more great stock investing tips, just check out my latest book, Stock Investing For Beginners.  You can browse through it for free right here http://a.co/0kJOvww.

Go ahead, check it out.  You’ll be glad you did.  http://a.co/0kJOvww.

To your health and prosperity – John

P.S. Note that on Jim Cramer’s Mad Money show on CNBC, he has an excellent segment called Am I Diversified?  Investors call in and tell him five of their top stocks.  Then he quickly evaluates them and tells them if they are diversified.  So you might want to watch this part of his show sometime – it’s very instructive – and Jim keeps it entertaining.