I recently wrote a post titled Rule # 1 of investing. The # 1 rule is to never lose money and you accomplish this by investing in assets that have a low probability of losing money. You have to focus on defense first. This can only be done by knowing where the safe investments are. The safe investments have consistent upside potential with limited drawdowns. They are index funds. Total stock market index funds and S&P 500 funds. Some individual stocks like apple and other large cap tech stocks may also fit the bill if you have a higher risk appetite. For example, apple is the main company that is holding up the tech sector by its boot straps. That’s why it’s the #1 holding of VTI, VOO and QQQ. It’s because of the limited drawdowns and high upside potential.
The second way to invest defensively is by not buying at the all time highs. Buy stocks at a discount when it has a pull back. This can also be done by dollar cost averaging and buying the same stocks every month. With dollar cost averaging you will be buying at the all time highs and 52 week lows, but since the stock market goes up over time, you will have a lower cost basis as the market trends up. This is great for long term buy and hold investors. If you’re interested in swing trading then you may want to find a good quality company with good fundamentals, moat and meaning and acquire it at a discount of at least 25 to 50% below the 200 day moving average with an exit plan of 250 to 500% increase in the price from the 50% below the 200 day simple moving average price point. Apple is a perfect example of such a company and if you want to find more just look at the top 5 companies that make up VTI, VOO, QQQ and the Russle 3000 index. Here is a hint. I promise you they all have the same top 3 or 5 companies making up each index. knowing when stocks are on sale is not only for swing traders. This is a perfect opportunity for buy and hold investors to add more to their position in a lump sum fashion.
There are other defensive strategies including diversification and bonds, but I want to end this post by giving an example of how to lose money in the stock market. Just in case you needed any help losing more. The best way is to buying risky unprofitable small cap company with very little institutional backing at the all time high and then sitting on your hands and doing nothing. Yes I know it could be the next TSLA, Amazon or Apple. I get it, but the risk of loss is extraordinary high. As long as you recognize this and understand the risk you’re taking then go for it with money that you are willing to lose.