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How to Never Lose Money in the Stock Market

By Patrick Astre

Now 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.”

Losing 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.

So how 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.

You 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.

“D” 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.

“A” 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 all seasons:

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%

The word “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 “value.”

“B” 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.

“L” 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.

Now 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?”

Well 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.

So go ahead, D.A.B.L – just don’t dabble.

Read other articles and learn more about Patrick Astre.

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