How do I invest without losing money?

You’re investing your hard-earned dollars to make your dreams come true, not to see them drip out of your brokerage account like change through a hole in your pocket.

The truth is that loss happens, and there’s no way to guarantee that you can invest without losing money. After all, even the world’s best investors pick the occasional dud.

But they don’t panic.

They understand that if you buy and hold for the long term, it’s possible one of your investments could go to 0. But you can gain many, many times more than you could lose.

The key is to play it smart. And here’s how…

Invest for the long haul

The market has its ups and downs, but over time, it goes up … and up.

In the short term, anything can happen — including market corrections and even crashes. One of your holdings could fall by 20% tomorrow.

But if you’re holding for the long term, you can ride out the downturns. While it might seem devastating today, that 20% drop won’t matter in 10 or 20 years. If you ride out the dips, you’ll likely benefit from the long-term wealth-building magic of the market, which is why it’s critical to start investing as early as you can.

“Successful investing takes time, discipline, and patience,” said Warren Buffett, quite possibly the world’s greatest investor. “No matter how great the talent or effort, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.”

Don’t put all your eggs in one basket

Portfolio diversification — investing in stocks of all sizes and geographies, bonds, cash, and alternatives such as REITs — is critical when it comes to protecting your money.

Why? Each of these asset classes will respond differently to market swings. This means that even if the stock market crashes, your other investments will pick up the slack.

Unfortunately, there’s no one-size-fits-all rule for how you should allocate your investment dollars. It all depends on how much you can afford to lose…

If you will need your money in the next five years or so, allocate more to things like money markets, Treasuries, certificates of deposit, and corporate bonds. These typically provide greater stability and lower risk than stocks.

Otherwise, the stock market is the place to be. While they’re riskier than these other investments, as an asset class, they’ve proven over decades upon decades to be a ticket to higher returns.

For some more detailed insight, check out our Foolish rules for asset allocation.

Invest in businesses, not shares

As Buffett once said, “Risk comes from not knowing what you’re doing.”

One of the riskiest moves investors can make is investing in companies they don’t understand. Luckily, there’s an easy way to avoid this mistake…

Think like a business owner and only buy what you understand.

This doesn’t mean that you have to spend hours reading through financial filings and memorizing nitty-gritty details about the company’s operations (unless you feel so inclined, of course).

But it’s a good idea to have at least a basic understanding of every company you invest in — what it does, how it makes money, what its prospects looks like, etc. As master investor Peter Lynch said, “Never invest in any idea you can’t illustrate with a crayon.”

(It might not come as a huge shock that The Motley Fool has conference rooms named for Lynch and Buffett at our worldwide HQ.)

The Foolish bottom line

Remember, every single investment comes with risks. Frankly, there’s no way to invest without at least the potential of losing money —even the money you cram into your mattress will lose value to inflation. But by following these three Foolish tips, you can minimize your losses and maximize your gains.

For other Foolish advice, head over to our 13 Steps to Investing Foolishly. If you’re looking for some smart stock picks that will help you build your wealth, check out our flagship investing service, Stock Advisor, available now for a 7-day free trial.

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