The 7% Rule

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I’ll get back to vacation and fun pictures as the week rolls on…but today I’ll stick with our Finance Monday.

So what is the 7% rule in stocks? The 7% rule in stocks refers to a risk management strategy where investors sell a stock if it declines 7% to 8% below their purchase price.

Obviously there are many other factors involved and I wouldn’t suggest panic if the drop occurs during an overall market dip. But this is also why I don’t invest in a lot of individual stocks vs ETFs. So does the 7% rule apply to ETFs as well…not really. Of the roughly 20 stocks I manage myself, only 4 of them are individual companies. And they are all down varying amounts….but that is because they pay extremely good dividends.

For example: if one of my individual stocks is down around 6-8%, or even 10-12% for that matter, but the dividends I have accumulated from holding the stock for an extended period of time has surpassed the total loss….what a win-win! I can either continue to take my monthly or quarterly dividends (provided the stock doesn’t continue to fall further) or wait until the end of the year and sell the stock for a loss (tax harvesting).

I have found this to be quite productive though I wouldn’t do more high risk/high dividend stocks beyond the few I already have in my portfolio. Slow and steady still wins the race in the stock market but if you’re paying attention and educating yourself, you can definitely find some potential quick wins. Happy investing!!

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