Legendary investor Warren Buffett has said his number one rule is “never lose money.” The importance he places on this can be judged from his second rule: “Don’t forget rule No. 1.”
In this article, I’ll offer a few tips on how to “never lose money” in the stock market.
Away you go Buffett has frequently recommended index-tracking funds for most investors. These simply track the performance of a stock market index, such as the UK’s FTSE 100. They have very low annual management charges, and studies have shown they deliver a better return than that achieved by the majority of private and professional stock pickers.
With a tracker fund, you need no knowledge of accounting, or time for researching stocks. Simply set up a regular automatic investment into your chosen fund (£100 a month, £500, £1,000, whatever you can afford), and away you go.
And keep going Sure, stock markets have a habit of crashing from time to time. But historically, mainstream indexes like the FTSE 100 have never failed to recover and go on to make new highs. Panicking and selling all your investments in a market downturn is absolutely not the way to never lose money.
Indeed, market corrections (dips of up to 20%) and bear markets (20%+ declines) shouldn’t be a cause of fear but of rejoicing. You’re getting more long-term bang for your buck at these times.
During a hefty correction, maybe even think of dropping a few little luxuries and upping the monthly investment in your tracker. A full-blown bear market? Perhaps that expensive holiday or new car could be put on hold. Turbo-charging the growth of your nest egg tracker at depressed prices will be well worth the short-term sacrifice.
History tells us that diligently investing even relatively modest monthly sums in a tracker over your working career can set you up for financial independence in later life. It’s as close to a foolproof strategy to never lose money on the stock market as there is.
If the day were ever to come when a major stock market index fell to zero, or an irrecoverable fraction of its previous level, you’d have a lot more to worry about than your capital loss. You’d be having to deal with whatever apocalyptic scenario had laid to waste the world as we know it.
Individual stocks Broadly speaking, the same principal of keep calm and carry on investing applies to investors in individual stocks. One key difference is that individual companies can — and sometimes do — inflict a catastrophic total capital loss on investors.
One way to mitigate individual company wipeouts — so that you never lose money at the total portfolio level — is to own a large number of stocks, including a good proportion of blue-chips.
Many investors own several dozen stocks, some hold 100+. Risk wise, such a strategy is similar to a tracker, and you should be able to grow your wealth in a similar way. You might do a bit better than a tracker or a bit worse.
If you shoot for much higher rewards by owning only a handful of stocks (I’ve even known the lunacy of some investors going all-in on one), there’s no guarantee you’ll never lose money. You’ll need to be extremely skilled and experienced in accounting, or extremely lucky, to succeed with such a strategy.
G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.