“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” – Warren Buffett
With all due respect to Warren Buffett, the #1 rule in investing is not anything close to “never lose money.”
In fact, the entire notion is absurd. Anyone who has ever invested in the history of the world has lost money at one time or another. Buffett himself lost close to 50% on two separate occasions. Being in a drawdown is the norm, not the exception. That is the price you pay in exchange for a higher return than a risk-free savings account.
So what is the number 1 rule in investing? That’s an impossible question, but if I had to pick just one it would be the Peter Lynch line about “knowing what you own and why you own it.” For if you don’t get that one right, you won’t hold any investment long enough to reap the benefits of compounding. You can have the best assets/strategy in the world but if you don’t understand what it is you will abandon it at the first sign of trouble. And believe me when I tell you that there will be many times of trouble.
Most advisors nowadays focus on asset allocation for their clients, typically a diversified mix of stocks and bonds. This is a good start, for asset allocation is the most important determinant of portfolio returns.