2. Lesson: Never Lose Money

One of the most critical factors for gaining wealth and reach financial freedom is to never lose money. It is far easier to lose money than to gain money. Whether you are an investor, a 9-5 employee, an entrepreneur or freelancer, you have either lost money on investments or spent money on useless products. You have to protect your money far better than you are currently doing. You might think that you are already protecting it, but my guess is that you can do an even better job.

As Warren Buffet says:

“Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1.”

I have risked a lot of money to gain more rapidly. That worked initially, AS I GOT LUCKY, but luck runs out. And let’s face it, unless you have extensive and unique knowledge of a certain market, you are bound to luck to outperform the market. Since I made some large sums of money with lucky investments, I got far too confident in my own skills. And I continued with investing in different stocks and commodities, I even used CFD (Contracts for Difference) to speed up the process.

With CFD you can trade and “bet” on different stocks, indexes and commodities with far more money than you hold on your account. That’s called margin trading. You can earn far more money, but you can also lose more money than you currently have. The risk is dramatically increased. I highly recommend you to not trade on margins unless you know exactly what you do and have a clear stop-loss strategy.

In 2016 I lost a substantial amount of the money I earned the previous years on trading. I should have been more careful and taken Warren Buffet’s advice. However, I’ve learned the hard way and now I’m more careful with my bankroll. That is why the advice is so important to remember and to accept. Never lose money.

What does this mean?

If you are looking to invest your money in stocks or commodities, you have to be sure that you won’t lose your money. This is nearly impossible to know, but there are some steps you can take. If you look at the historical trends, the one investment strategy that never have failed is to invest in index funds. Indexes follow the market, and even with some major financial crashes like the one in 2008, you would still have earned more than you invested pre 2008 if you had invested the same amount on a yearly basis. There are some exceptions like the Japanese index Nikkei 225:

As you can see from the graph above, if you started investing in Nikkei 225 from 1989 with the same amount on a yearly basis, you would have suffered a quite substantial loss. But still, the Nikkei Index is currently above all other periods before 1985, and my guess is that we will see Nikkei 225 above 40 000 within the next 20 years unless the entire economy goes under (which is an unlikely but possible scenario).

Investing smart is not the only solution

The entire idea is to never lose money. If you are not currently investing because you have too little money to play with (yes I say play), then you still have a lot of options to secure your money. My golden rules are the following:

  1. Cut your monthly expenditure
    • Do not use credit cards, if you have a credit card debt: pay it as fast as possible.
    • If you are able to; pay e.g. 20% more on your mortgage where the end goal is to become debt free as fast as possible.
    • Buy fewer products. I’m sure you can cut down your consumption with at least 25% per month. I urge you to set up a spreadsheet with all your monthly costs and go through everything you spend money on. If you go clubbing every weekend, could you reduce it to twice a month? If you smoke 6 packages a week, could you reduce it to 3 packages? I’m not saying that you should stop smoking or stop clubbing, as that might be too hard to do, but I’m sure you are able to reduce your consumption quite drastically.
  2. Focus on the money
    • I am not a greedy bastard, but I’m aware of what I’m spending my money on. The money you spend is money you won’t see again. You should not be obsessed with money, but you should still focus on it if you want to become financially independent.
  3. Don’t risk your money
    • If you are looking to invest your money, I would say in 9 out of 10 cases, never invest in anything other than index funds or assets that have shown a steady rising trend over the past 50 years. If you invest in a specific stock, or cryptocurrency, you are actually betting against the market. You then believe you can outperform the market, which in 50% of the cases, you really can’t.
  4. Ensure cashflow
    • If you have a cashflow, either from a job or your own business, focus on that and make sure that you won’t lose it. The best way to increase your wealth is to earn more money. If you got a 9-5 job, you are stuck to your monthly salary but you can still find other ways of increasing your monthly cashflow. What if you can do a side gig? What if you can offer your services on your spare time and try to build a small client base after your normal working hours? Maybe that can help you, in the end, quit your job and run your own business?

What are your thoughts? Leave a comment below and let me known.

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