Here’s one piece of advice I have for anyone looking to make money in stocks: either trade often or not at all.

People who get caught somewhere in the middle almost always lose money.

I see it happen all the time as a losing “trade” becomes an “investment,” or an “investment” that’s down becomes a “stop loss trade.”

It isn’t hard to figure out how to be a good trader or investor. It is, however, hard to stick with that discipline.

Today, I’ll show you how to apply this piece of advice when deciding how to allocate capital in your investing portfolio.

Less Is More

First, let’s review the difference between investing and trading.

In my view, an investing strategy focuses on much higher returns than a trading strategy. The trade-off is that with investing, you can have extended periods of losing money.

Patience is key when it comes to investing. Higher returns can be achieved, but they don’t happen in a day, a week, or a month — it takes years.

When I wrote to you last week about allocating capital for a trading portfolio, I said you should plan on an average of 20 positions. (If you missed it, you can read the full article here.)

This portfolio would also be able to move quickly from low exposure (5–10 positions) to high exposure (25 or more).

My view on an investing portfolio is quite different.

Traditional investing wisdom argues for dozens of positions, and many professional portfolios will hold 30–60 positions. Rigorous analysis, however, proves this wrong.

A great investing portfolio only needs 10–15 positions to achieve the benefits of diversification. Now, it is important to recognize that this means these positions should be relatively unrelated.

You can still own multiple technology stocks. It is unwise, however, to have more than two or three stocks playing directly to the same theme in a portfolio this concentrated.

Upside Potential

Another key to building an investing portfolio is selectivity. This is by far the most important part of the process.

If you are only picking a dozen or so stocks, then you should only be focused on the highest returns and best risk/rewards.

For the investing products where I make recommendations to readers, I don’t even consider entering a position if I don’t think we can double our money within a couple of years.

Honestly, I start by looking for stocks that I think can go up a minimum of three to five times their current value within five years.

Obviously, few stocks go up this much. And inevitably, you are going to be wrong on several of your stock picks.

But with this investing approach, we only need a couple of names to work in order to make up for the losers.

Think of a sample portfolio of 10 stocks. If over five years, three of them get cut in half, three of them lose 10%, one goes up 10%, one doubles, and one goes up tenfold…

Then that means you still made a +10% annualized return. And this is in a portfolio where you lost money on more than two-thirds of the positions!

The next step is how you consider your stop loss.

Cut Your Losers

In investing portfolios, I run an extremely rigorous stop-loss methodology rooted in fundamental analysis (not price).

I constantly reevaluate each position and ask myself, “Do I still have confidence that the company can go up fivefold?”

Most of the time, we will sell the position if management misses earnings for several quarters.

If they can’t get it together to deliver for a year or so, we’ll move on to a company that is delivering on their promise.

Remember, we only need a dozen stocks!

The final piece of our investing portfolio strategy is a decision to be made by you as the investor.

To Trade or Not To Trade…

As I mentioned earlier, you can trade your investing portfolio a lot or not at all.

I am very comfortable trading around positions. When they get very overbought in the short term, I like to sell some. When they get oversold, I like to buy.

I consistently generated additional returns by adeptly doing so when I was managing billions of dollars for investors.

Our “dollar” turnover was high as we traded quite a bit. But our “name” turnover was extremely low, since I seldom changed the stocks we owned.

This works very well for disciplined traders, but not for most people.

So my advice for most folks is to simply pick your 10–15 tocks and then deploy your capital.

After that, use consistent additional contributions to your portfolio (or dollar-cost averaging). This allows you to take advantage of stock market downturns while not missing the best of times.

Building an investing portfolio is very particular to each investor. But these guidelines can help anyone.