When we talk about bad stocks, many stocks can actually be good, but you can own them at the wrong time. It depends on how long you have to wait to cash out while you have a profit. If you are about ready to retire, you don't want to lose 50% of your money due to stocks that are in a bear market. So, my reference to bad stocks will often be related to owning them at a bad time.
Secondly, an investor needs to have a controlled allocation system so that only a small amount of money will be invested in risky stocks. Bonds should be a part of everyone's portfolio. A 60/40 stocks/bonds plan is often mentioned by financial advisors, and I think a 50/50 stocks/bonds plan is also good. A 50/50 ratio will show you how important bonds are during a bear market, and you will become sold on the idea of always owning quality bonds.
Thirdly, concerning owning risky stocks such as penny stocks, I recommend a $100 rule. Do not purchase more than $100 worth of any penny stock until you are very familiar with how the stock trades and what its long term potential really is. Some stories can sound really sensational and urgent, but you must think about the many things that could go wrong.
For example, a gold mining exploration company may have made a high quality gold discovery. First, you need to think about the price of gold in general. Gold's price has dropped from around $1800 per ounce in 2011 to $1140 per ounce in 2014. Can the company mine gold for $1100 per ounce and still make a profit? If so, how much will it cost to build a mine and how long will it take? You must consider all of these negatives before you buy a penny stock because it will most likely be years before you ever make a significant profit, and the stock price will likely decline more than 50% while you wait. How much time and patience do you have even if you have picked a good stock?
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