At the dawn of my career, I took a great risk management class taught by Jane, head of risk management at Chase Manhattan Bank (now JP Morgan).

To start the class, Jane asked us to imagine a game rolling one die. If the die shows the numbers 1 through 5, you double your money. However, if you roll a 6, you lose all your money.

Imagine two people playing the game. Player A always bets everything. Player B always bets 10% of his or her capital. Both start out with $1,000.

The first five rolls are 5, 4, 2, 2, and 3.

By the 5th roll, Player A’s capital would have re-doubled from $1,000 to $2,000, $4,000, $8,000, $16,000, and finally to $32,000.

Player B would have only $1,611.

But on the sixth roll, the die comes up 6.

Player A loses everything.

Player B’s capital declines to $1,450, a minor loss, but Player B can keep playing.

Overconfident and overly aggressive players often lose to more conservative players. The same is true in investing.

Jane used this example to teach us the value of not putting too much money on any single idea, any single trade, or any single investment. She advised dividing the capital into a minimum of 10, maybe 20, maybe even 40 positions. A single failure wouldn’t spell death for your investment plan, but small wins would add up to large gains over time.

Modern Gamblers

The reason I revisit this topic is that I hear about inexperienced investors putting all their money into one stock, doubling it, taking the money out, putting it into another stock, doubling it again, another transfer, another double, and then losing it all on the fourth go-around.

I bristle when I see people treating investing like gambling. If you want to invest aggressively, taking up new positions in hopes of explosive growth, fine, but be sure to scale in.

Rather than investing all your money, start by investing 5%, then wait. If the investment gains from your initial entry point, invest another 2.5% and then another 1%.

If the initial investment declines in value, revisit your original investment thesis. If your original analysis remains intact, perhaps you should add to the position. If facts have changed and owning the investment no longer makes sense, exit at a small loss. Never get into a situation where one catastrophic error can wipe you out.

It’s equally important to scale out of good investments. That may sound counterintuitive — why wouldn’t you want to ride the wave to the top of the crest?

If you could predict the top tick (the highest trade price of an investment) with absolute certainty, that approach would be the way to go. But no investor knows the exact moment when a stock will top out and start declining.

If you have an investment that’s doubled, it’s OK to take some money off the table.

At my firm, we start any position at about 2.5% of a client’s assets. We start paying attention when it gets to 5% of their assets, and above 5%, we automatically sell enough stock to keep the position at or below 5%.

This practice has obliged us to scale out of profitable investments in Amazon, Apple, and JPMorgan, but the process of selling high frees up cash to buy low in other ideas.

Scaling out also applies to 401(k) holdings and restricted stock.

Many of our clients have the good fortune of getting stock grants from their companies. As time goes by, these clients exercise the stock options into restricted stock, and later sell the restricted stock.

It’s tempting to never sell any of that stock because no sale means no capital gains, and no capital gains mean no tax. The wealth keeps going up and up and up.

However, employees of companies with employee stock plans face risks to their income and their net worth.

Imagine how employees of Sears must feel.

Sears’ stock price peaked at $135 a share in 2007 and is currently worth $0.02 after the company declared bankruptcy three years ago.

Deutsche Bank’s stock price peaked at $122 a share in 2007 and is currently at $12.42 a share.

How do you recover from a 90% loss?

Investing should be a cycle of well-measured ebbs and flows, carefully stepping into new positions and wisely stepping out of over-performers.

David Edwards is president and wealth advisor with Heron Wealth, a $500 million registered investment advisor based in New York City working with 225 client families across the U.S. and around the world. Dustin Lowman contributed additional research for this column.

At the time of publication, Edwards and/or his clients held positions in Apple, Amazon, JPMorgan, and Deutsch Bank.