Think about this: A friend has a tip from another friend who works for a company that is about to report a very strong earnings report. He urges you to jump on the stock in order to make a pile of money on a “sure thing.” The recommendation sounds tempting. You toss and turn all night as you think about how much money you can make if your friend is right. In the morning you decide instead of just buying the stock, you’ll buy 100 call options and make 10 times the amount of money you would with a stock. Obviously this decision has a few problems. For one, it constitutes insider trading, which is illegal. Secondly, it violates any rules of protecting your downside by not doing your own research first and determining if this is a company worth owning. Maybe most importantly, what does your friend know about investing? Is he qualified to be giving you expert financial investing advice? Why are you trusting your money on a tip? Avoid listening to the wrong people who are not qualified to be giving you advice, do your own due diligence, and stick to your rules. If professional investors cannot accurately predict the direction of the market, chances are your friend is not capable of giving you advice. Similarly, just because an analyst suggests that a stock is overvalued during a television interview, this is not a good enough reason to run out and sell the stock.

There is a good reason why financial advisors stress having a balanced,diversified portfolio – because you will always have losers. By being adequately diversified in the proper asset classes, you balance your risk and reward by distributing your funds in a way that are in line with your financial goals. As some asset classes will earn more than others, over time your portfolio will become unbalanced and require you to make adjustments to get back on track. Likewise, if your investing rules are to have $1,000 in shares spread across 5 stocks, your portfolio will also require some maintenance. As a result of some stocks increasing in value and others decreasing, you may need to sell where you experience gains in order to buy more shares that are experiencing loses and are still great stocks to own. These steps are often ignored, but should be a vital part to your investing strategy in order to maintain a balanced, protected portfolio.

Losing money is the only thing keeping investors from creating wealth. Sounds obvious, but many investors don’t pay attention to this mistake. As Warren Buffet so eloquently put, “The first rule of investing is don’t lose money. The second rule is don’t forget rule number one.” When you lose money, it takes twice as much money just to get back to break even. For example, if an equity loses 50% in value it will require a 100% increase just to get back to break even. When you take substantial risks, it’s not unusual for your asset to decrease 50% in value, but gaining 100% is far more unusual. While the dividends and earnings from your winning stocks can be reinvested in order to take advantage of compound interest, your losers also compound and quickly eat away any gains you achieve in other investments. No one is immune to losing money, but when investors put themselves in too much danger of losing money, those losses compound. But all investors seek to make money, which is why they take some risk. In order to accumulate great wealth, it is necessary to protect the downside by investing in what appears to be as close to a sure thing as possible.