How to Never Lose Money in the Stock Market
By Patrick Astre
that’s a pretty controversial heading, isn’t it? It reminds you of
Will Rogers’ line: “I’m more interested in the return of
my money than the return on my money.”
money seems to be as big of a part of stock market investing as
wealth building. Losses and their devastating results certainly
draw more attention. In fact, the U.S. Securities and Exchange
Commission, as well as other stock market watchdog agencies, require
a warning to investors that losses are possible.
can I get away with that heading? Simple: Because it’s true! A
man named Benjamin Graham first wrote about the system in the ‘50s.
Warren Buffett and his Berkshire Hathaway company followed these
rules and became the most successful stock market investor of all
times. These are their rules, and their system. And here it’s
presented in easy-to-follow terminology.
must have a hook, and the acronym I use for this system is this:
D.A.B.L. (Don’t dabble in the markets, DABL instead). Each letter
of the acronym stands for a part of investing; a rule if you will.
Follow these four rules and you will never lose money in the
market. Break even once, and you’re gambling. There’s an old time
Brooklyn comedian, named Myron Cohen, who said this about gambling:
“Here’s how you come
out ahead in Las Vegas: When you get off the plane, walk into the
propeller!” So don’t walk into the propeller, follow the D.A.B.L.
and build your wealth as sure as sunrise.
Stands for Diversification. To be properly diversified
you need thousands of stocks encompassing all descriptions. Large
Caps, Mid-Caps, Small Caps, International, Growth, Value, Growth and
Income, etc. When you have a widely diversified portfolio,
individual stock losses are swallowed by individual gains. The
“Enrons” will be offset by the “Microsofts” and “Exxons.” In our
practice, we use 54 mutual funds to achieve this. Each fund owns
hundreds and thousands of stocks. Diversification upon
diversification. Now you might ask, “But what if I’d bought
Microsoft and Exxon 20 years ago? Wouldn’t I have made much more?”
Yes you would have. But what if you’d bought Enron? Before it
crashed and burned, Wall Street analysts wouldn’t shut up about what
a great buy Enron was. You’d have lost everything, and it wouldn’t
have recovered the same as the rest of the market when times got
better. In short, diversification removes the gambling aspect of
stock market investing.
Stands for Asset Allocation. This goes hand in hand with
diversification. This is simply allocating investments in varied
sectors of the economy to minimize market downturns and profit on
the inevitable upswings. Here’s a conservative asset allocation for
Small Cap Growth funds 5%
Mid Cap Growth funds 5%
Large Cap Growth funds 5%
Small Cap Value funds 10%
Mid Cap Value funds 10%
Large Cap Value funds 10%
Value Blend funds 10%
Aggressive Growth funds 10%
High Yield Bonds fund 5%
Investment Grade Bonds 5%
International Global Bonds 5%
Global Emerging Markets 5%
International Growth 5%
International Value 10%
“cap” refers to Capitalization – the size of the stocks the fund
purchases. “Blend” means the fund invests across all styles and
sizes in its area. International usually means outside the U.S.,
while global includes U.S. investments. This allocation uses
strictly mutual funds. Software like Morningstar places each fund
in the “style boxes” described in this allocation. If you don’t
have enough assets to buy all those funds, start with “value” and
“growth,” and leave “aggressive” and “emerging” markets for last.
If you’re investing in your 401(k) and don’t have all those options,
do the best you can to duplicate this allocation with emphasis on
Stands for Buy and Hold. Buy and hold works, as proven
repeatedly by the likes of Benjamin Graham and Warren Buffett.
Buying and selling securities results in losses or minimum gains for
most investors. It does generate lots of commissions, which is why
the brokerage industry hates that one fact. However they’re coming
around with fee-wrapped account, tacitly encouraging buy-and-hold.
Stands for Long Term Goals. The minimum holding period
is five to seven years. Diversified buy-and-hold investments have
achieved this goal in every seven-year period since 1969. Stock
market investments should always be held for the long term.
Anything else is gambling.
here’s a question that always comes up: “I will be retiring next
year. Shouldn’t I be invested mostly in safe investments like
treasury bonds and CDs?”
that depends on how much money you have for retirement. The D.A.B.L.
system is strictly to make money grow – make the pie bigger. Most
retirees have enough funds to leave a certain amount alone for seven
years. That’s the amount that should be invested for growth. It’s
going to vary for everyone. There’s no pat answer – you’ve got to
analyze your own situation. Remember, this system is for growth,
and every retirement portfolio needs growth – a certain amount of
money targeted to get much larger in a given number of years to
offset the ravages of inflation.
ahead, D.A.B.L – just don’t dabble.
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