03/26/2013 08:54 am ET Updated Dec 06, 2017

Think 'Score Gains,' Not 'Stop Losses'

One of the most common questions I get asked by investors is, "Should I set stop losses to limit my losses?"

My answer? " Why not set stop gains to capture gains instead?"

Take a look at the chart below.

Performance of the Dow Jones Industrial Average
January 1, 2011- February 26, 2013

Source: Used with permission from Microsoft.

When you are on a rollercoaster with as many ups as downs, if you set stop losses, you are losing every time the market pulls back, which is often. This is a losing formula. If you set capture gains, you are winning every time the market rises, which is just as often as the pullbacks! This is a winning formula.

When volatility is the name of the game (like it is in today's market), it is very important to use winning tools, strategies and mindsets.

I am constantly getting investors to think like "winners" instead of "losers." No one likes to think of themselves as a loser, but if you are worried about losses instead of committed to capturing gains, then you have a losing mindset, even if you don't admit it. The first thing most of us need to work on is changing our mindset. Stocks and bonds have been around for centuries and in fact score more than twice the returns of gold and real estate over a 30-year period. The average annualized return of stocks and bonds for the last 30 years is 11 percent and 10 percent, respectively, while gold and real estate returns were under 5 percent.

Be sure you aren't getting your money mindset from someone who profits on your fear (and greed)... Lots of homes, mortgages and HELOCs were sold in 2005-2008 by brokers who earned commission and wanted to pay their own bills, without any consideration as to how the sale might negatively impact the lives of their clients. With over twelve million foreclosure starts since 2008, a lot of lives were negatively impacted. You can't turn on the television today without someone trying to sell you gold, telling you that America is going to hell in a hand basket and you'll be the big winner with your gold coins. Buyer beware.

You'll never score a goal if you aren't charging for the end zone. If you are consumed with Apocalyptic visions every time the quarterback steps back a few feet in negative territory before throwing the touchdown pass, you won't be running to your mark to catch it.

So, how do you activate Score Gains Thinking?
Below are six easy steps to winning on Wall Street.

1. Pick a Winning Team
2. Employ a Winning Game Plan
3. Be a Patient Buyer
4. Capture Your Gains Early and Often
5. Limit Orders: The Key to Profitability in Volatile Markets.
6. Use Special Teams Strategically

And here are the details...

1. Pick a Winning Team.
A big component of a winning team is making sure that you have the right athletes on the field. You don't want your kicker playing linebacker, or your quarterback on defense. Go to your accountant for tax tips (not investment tips) and your brokerage to maximize your retirement accounts and nest egg preservation strategy. Grade your guru with a results test before taking any investment advice. Not all financial professionals have a winning track record, and some might have been an actor or rodeo rider last year. Access 10 questions in my book, You Vs. Wall Street, to determine whether your broker is a dream come true certified financial partner or just a salesman.

2. Employ a Winning Game Plan
A great nest egg strategy includes the following: 1. Keeping a percentage equal to your age safe. 2. Overweighting safe in volatile times. 3. Knowing what safe is. 4. Diversifying your "at risk" assets by size and style. 5. Adding in hot industries. 6. Avoiding the bailouts. 7. Rebalancing at least once a year -- preferably using limit orders. To learn more about this formula, read The ABCs of Money.

3. Be a Patient Buyer

Picking a great company or fund is the second step in the 3-Ingredient Recipe for Cooking Up Profits. (The first is getting more financial literacy, money knowledge and wisdom.) It is just as important to follow the third step -- "never pay retail." Be sure to buy your great stocks and funds at a good price. At minimum, check out the 52-week high and low. Other considerations include seasonal and annual trends, price to earnings ratio, earnings growth and the macro economic trend for the coming year. Almost all of the trends of yore have been turned on their heads over the last decade. Staying up to date with the changing tides, from an experienced, respected source, is key.

4. Capture Your Gains Early and Often

As you've seen in the chart above, the markets are very volatile. Today's profit is tomorrow's loss. A shot fired in North Korea, Libya, Afghanistan or Syria makes the markets tremble in North America. Even great companies, with long-term potential, have very large swings in their 52-week highs and lows simply because the market itself has been on a rollercoaster ride. So, rebalance your nest egg at least once a year and adopt a strategy of taking your profits early and often in your Stocks on Steroids portfolio.

5. Limit Orders: The Key to Profitability in Volatile Markets.

One of the best ways to ensure that you are buying low and selling high is to employ limit orders. When you are evaluating a fund or company you wish to own, be clear about the price you wish to buy it at and the profits you are hoping to see. Use limit orders, and you are released from the burden of watching the markets incessantly to hit the prices you desire! You can apply this to the rebalancing of your nest egg and to your Stocks on Steroids purchases, too. If you don't know how to do this, this is one of the best strategies that we teach at my Investor Educational Retreats. Join us!

6. Use Special Teams Strategically.

The winning strategy for your nest egg is different than it is for Stocks on Steroids. Stocks on Steroids (individual stocks) are not "money while you sleep." They require babysitting. Conversely, some of the large cap funds you want to purchase for stability in your nest egg would be a bad investment if you are looking to maximize short-term gains. Knowing your Jabba the Huts (that stabilize your portfolio) from your Hares (that can score gains) allows you to know which funds to buy for marathon performance and which companies are more likely to win in the short run. Just as aging football players are more prone to injury, New Chips are Safer than Blue Chips. Get the real score on that in The ABCs of Money.