Warren Buffett’s first rule of investing is NEVER LOSE MONEY. And his second rule is NEVER forget rule #1. If you learn nothing from the recent turbulence in the stock market, at least learn not to lose big.

Think about this for a minute:  If you lose 50% in the market, you need to get a gain of 100% just to get back to even.  How often will the market go up 100%?  It will likely take many years.  But, if you lose 20% in the market, it only takes a 25% gain to get back to even.  20% is still a lot, but a 25% rebound in the market is certainly a reasonable expectation and can be achieved in one year’s time.

There are a few ways to preserve your capital and avoid taking a big hit all at once.

1. Ease into your position. Don’t invest all at once. This was advocated by Jesse Livermore who could be argued was the greatest stock market speculator of all time.
2. Dollar cost average or value average over time. This is similar to easing into your position but different in that money is invested at regular intervals.
3. Use stop losses. These can either be mental stop losses which you just keep in your head. This requires that you are able to keep tabs on the market. Or, you can enter an order with your broker that will automatically execute under certain circumstances.
4. Purchase protective puts. So, instead of using puts to lock in profits as I suggested, use them to protect your capital investment. You can determine the amount that you are willing to lose and pick the appropriate strike price.
5. Consider an inverse hedge. There are several bear market ETFs that can be used to hedge against a decline in the market. Just be careful of the levered ETFs as they can be dangerous.