Law #1. Protect your capital . It’s easy to look back at the mistakes that big managers like Fisher made and big brokers like Merrill made and say, “Look! They bought the wrong investments. They screwed up.” True. That was a big mistake. But the bigger mistake they made was not their investment choices or timing. It was in their failure to protect your capital.
Act promptly to get rid of losers. Keep a ready store of cash. Remember: Just by keeping what you have you’ll be far ahead of virtually everyone else.
Law #2. Use common sense — follow your own instinct! If you can see with your own eyes that a company is going down the tubes, get out. Don’t let a broker or a financial planner talk you out of selling investments that are obviously burning a hole in your portfolio.
Law #3. Don’t count on the government to turn the economy around or save sinking investments. The government has already loaned, spent or guaranteed trillions of dollars, and the economy is still sinking. Trillions more are not going to change that trend. Yes, the government can stimulate temporary rallies in the stock market. But when and if it does, use them as opportunities to unload the bad investments you’ve been stuck with.
Law #4. Invest exclusively in liquid, heavily traded investments.
Beware of mutual funds, annuities, insurance policies or even bank CDs that lock you in with sales fees or penalties. Stay away from thinly-traded small cap stocks, municipal bonds or exoteric plans that can entrap you. It doesn’t matter how good the investment may appear. If you can’t jump out at a moment’s notice, it’s no good for these uncertain times.
Law #5. Stay flexible. One of the big mistakes Wall Street managers make is to limit their choices to stocks and be stuck in that mold. So when all stocks fall, there’s no way they can avoid losing money. Instead, expand your horizons beyond traditional investing approaches. As long as it’s based on common sense and as long as you can buy and sell it easily in an ordinary brokerage account, don’t scratch it off your list just because it’s new to you.
Law #6. Use investments that move independently of stocks and bonds. For example, currencies, which you can buy through simple instruments such as currency exchange traded funds —
Law #7. Find special situations that go up DESPITE a falling market — companies that are virtually depression-proof.
Law #8. Use investments that go up BECAUSE of a falling market , such as inverseETFs that soar when stocks sink.
Law #9. Balance your portfolio. You saw how it was obviously a mistake to place all bets on a bull market without any counterbalancing investments or hedges. Similarly, it could be a mistake to place all your bets on a bear market. In addition to inverse investments, at the right time, make sure you have some counter-balancing positions … in special situation companies, plus currencies, gold and even some commodities.
Law #10. Don’t fall in love with your investments. Take your profits along the way. Then roll those profits into new opportunities.
Law #11: Above all, be a contrarian and buck the crowd.
Looking back, whenever a broker, an adviser, even a friend or relative told you to “buy, buy, buy,” it was the worst possible time to invest. Likewise, looking ahead, when everyone finally throws in the towel and tells you to “sell, sell, sell,” it could be the best time to invest.”