ClusterGains

The best way to preserve your money along with making profits is to set up asset allocation boundaries where money from one group is not borrowed to invest in another group.  For example, if you have all your money invested in stocks, and the market goes down 50% like it did in 2008-2009, then you have suffered a tremendous setback.  What if you also need to cash out that money when the stock market is on the bottom?  Bear markets also happen every few years.  You will just be getting ahead when another bear attack occurs.

The solution is to have 50% of your money in bond funds at all times.  I know a man who lost 90% of his money in the Nasdaq tech crash of 2000-2002.  If he had held 50% of his money in bonds during the dotcom crash, he would have only lost 45% of his money.  Furthermore, assuming he had kept 50% in bonds, if he had diversified the remaining 50% of his stock money into five different sectors, his losses would have probably been only 10% or 15%.   

So, asset allocation is very important.  Nothing is absolutely certain in the stock market.  Good stocks can be taken down for a variety of reasons besides the frequent occurrence of bear markets.  Companies eventually become mature, and the stock market no longer puts a premium on them.  Individual investors will usually be the last to know when things go bad for companies, too.  By then, the stock price will already be on the bottom before an investor can sell.

You need to pick a bond fund with a proven record for the 50% allocation of your money.  Vanguard has a high-yield corporate bond fund (VWEHX) that has averaged more than 6% in returns on average for a 10-year period.  You could also split your bond money into three different mutual funds for more security.

Then, for your 50% stock allocation, that should be further divided into five different groups.  You should always have at least 10% of your money on the short side at all times.  TZA, the Direxion leveraged small cap bear is a good stock for this.  Do not hold the stock for long.  Sell it when you have made a good profit, and keep the money separate for the next time the stock drops to a low point.  You will probably have several opportunities each year to make a double-digit gain.  

Then, for the remaining 40% of your stocks allocation, pick whatever you want.  However, it should be divided into four different groups.  I would put 10% on a dividend paying REIT like AGNC, American Capital Agency.  They paid a 19% dividend for all of 2011, and the dividends have been in the double digits for three years now.  Click on the links of the right column to find out more about AGNC and other stocks.

Another 10% could be placed on Google, ticker symbol GOOG.  Google will continue to dominate on the internet.  The last 20% could be put on two stocks in two other sectors.  For example, I would put 10% on BZH, Beazer Homes, because homebuilding will eventually come back.     

The final 10% would be used for an oil stock because the world will always be craving oil.  You could buy Chevron, CVX, or TNK, Teekay Tankers, an oil shipper.  Again, do not rebalance your portfolio if one group gets ahead of another.  Just keep reinvesting your money inside the winning groups.  Then, remember that your safety net also resides in your 50% bond allocation that should be stable in spite of the stock market's peaks and valleys.