Ask Matt: Why the 10% rule is important (2024)

Matt Krantz|USA TODAY

Q: Why is the 10% rule so important for investors?

A: If you're buying individual stocks — and don't know about the 10% rule — you're asking for trouble. It's the one rough adage investors who survive bear markets know about.

The rule is very simple. If you own an individual stock that falls 10% or more from what you paid, you sell. Period. You don't rationalize the loss and wait for the "good stock" to "come back." Investors who dabble with individual stocks understand that getting back to even following a loss greater than 10% is a difficult task.

Take this example. Say you paid $50 for a share of a stock that rises to $60. If the stock drops to $45 a share, you should be out. End of story. There's a mathematical reason for this. The percentage gains needed to recover from a big loss quickly balloon. Going back to the example of the stock that started at $50 a share and dropped to $45. Just to break even — and get back to $50 — the stock needs to rise 11.1%. Let's say instead of selling at a 10% loss, you wait until the stock falls to $40 a share, for a 20% loss before selling. That means, the stock needs to jump 25% just for you to break even. And to recover from a 30% decline to $35 a share in this example, you'll need a 43% rally.

The 10% rule could become even more important if the market continues to drop. Savvy investors know it's just as important to know when to sell a stock as it is when to buy it.

Remember, though, the 10% rule applies only to individual stocks, which are mostly riskier than the market. If you're a long-term investor with a diversified portfolio, academic studies have shown it's much better to ride out the volatility. There are also more complicated ways to hedge against big losses by using derivatives such as options. But for a rule of thumb, the 10% rule is a great guide.

USA TODAY markets reporter Matt Krantz answers a different reader question every weekday. To submit a question, e-mail Matt at mkrantz@usatoday.com or on Twitter @mattkrantz.

Ask Matt: Why the 10% rule is important (2024)

FAQs

What is the 10 percent rule in psychology? ›

10 Percent Rule: The 10 percent rule is used to approximate the independence of trials where sampling is taken without replacement. If the sample size is less than 10% of the population size, then the trials can be treated as if they are independent, even if they are not.

What is the 10 percent rule in productivity? ›

It's called the 10% rule because Cohen realized that when you attempt something ten times, you'll probably be successful once (10% of the time). Either you'll achieve exactly what you set out for, or you'll get something you never even knew you wanted.

How to use the 10% rule? ›

Step 1: Identify the population size, , and calculate 10% of the population size, . Step 2: Identify the sample size, . Step 3: Compare the sample size to 10% of the population size. If n ≤ 0.1 N then the 10% rule is satisfied.

What is the 10 percent mindset? ›

The 10% target means deciding what we want most in life, and making 10 attempts at it. This dramatically increases our chances of success. Most people don't even make one attempt at really striving for what they actually want. The purpose of the 10% target is to get very comfortable with failing 90% of the time.

Why is 10% rule significant? ›

The ten percent rule of energy transfer states that each level in an ecosystem only gives 10% of its energy to the levels above it. This law explains much of the structural dynamics of ecosystems including why there are more organisms at the bottom of the ecosystem pyramid compared to the top.

Why is the 10% rule a thing? ›

On average only 10 percent of energy available at one trophic level is passed on to the next. This is known as the 10 percent rule, and it limits the number of trophic levels an ecosystem can support.

What is an example of the 10% rule? ›

For example, a plant will use 90% of the energy it gets from the sun for its own growth and reproduction. When it is eaten by a consumer, only 10% of its energy will go to the animal that eats it. That consumer will use 90% of that energy and only 10% will go on to the animal that eats it.

Why is the 10 condition important? ›

The 10% condition in statistics stipulates that when sampling without replacement, the sample size should not be more than 10% of the population. This rule helps prevent bias in statistical results, especially in studies where sampling plays a crucial role.

What is the rule of 10 decision making? ›

The 10–10–10 rule is a transformative approach that involves examining the potential impact of our decisions over distinct time horizons. When faced with choices, individuals are encouraged to consider the effects of their decisions over the next 10 minutes, 10 months, and 10 years.

What is the most powerful mindset? ›

It's about believing that you can grow, change, and improve. Through her studies, Dr. Dweck discovered that students with growth mindsets significantly outperformed children with fixed mindsets. Believing that you have the ability to grow actually has a huge effect on morale and ultimate success.

What does a successful mindset look like? ›

Those with a growth mindset understand that they can achieve their professional goals with persistence, adaptability and a strong willingness to evolve. A success mindset involves all these traits, including the right attitude and temperament, realistic thinking, and the ability to change and improve.

Does mindset determine success? ›

When our mindsets become habitual, they define who we are, and who we can become.” Dweck's work shows the power of our most basic beliefs. Whether conscious or subconscious, they strongly “affect what we want and whether we succeed in getting it.”

What is an example of the 10 percent rule? ›

For example, a plant will use 90% of the energy it gets from the sun for its own growth and reproduction. When it is eaten by a consumer, only 10% of its energy will go to the animal that eats it. That consumer will use 90% of that energy and only 10% will go on to the animal that eats it.

What is the 10 percent condition example? ›

Imagine a small town with a population of 1,000 residents. A researcher decides to conduct a survey about a local issue. According to the 10% condition, the sample size for this survey should not exceed 100 residents (10% of 1,000).

What happens if the 10 percent condition is not met? ›

The text has mentioned “The 10% Condition” (at least) twice so far: p. 407 “Bernoulli trials must be independent. If that assumption is violated, it is still okay to proceed as long as the sample is smaller than 10% of the population.”

What is the 10 percent law? ›

According to the 10 percent law, 90% of captured energy is lost as heat in the previous level and only 10% is available for the next level. At each trophic level, about 10% of the energy is transferred to the next trophic level whereas the rest is utilized for metabolic activities and lost as heat in the environment.

Top Articles
Latest Posts
Article information

Author: Dr. Pierre Goyette

Last Updated:

Views: 6696

Rating: 5 / 5 (50 voted)

Reviews: 89% of readers found this page helpful

Author information

Name: Dr. Pierre Goyette

Birthday: 1998-01-29

Address: Apt. 611 3357 Yong Plain, West Audra, IL 70053

Phone: +5819954278378

Job: Construction Director

Hobby: Embroidery, Creative writing, Shopping, Driving, Stand-up comedy, Coffee roasting, Scrapbooking

Introduction: My name is Dr. Pierre Goyette, I am a enchanting, powerful, jolly, rich, graceful, colorful, zany person who loves writing and wants to share my knowledge and understanding with you.