Eliminate or severely limit your investments in companies with large downside risks to avoid huge losses

When you think that there is a large downside risk in investing in a company, you should be especially vigilant even if expected returns are high.

• A highly leveraged balance sheet is one indicator of high downside risk in a company.  

• Even countries that borrow large amounts of money are not safe:   Russia defaulted on its loans in 1998.

Since even a country the size of Russia can get into trouble, clearly you should never think of any country as "too big to fail."

By eliminating or severely limiting your investments in companies with large downside risks, you should be able to avoid the huge losses emanating from market volatility.

On the other hand, market volatility may cause good companies' stock prices to go down in the short run, giving you good buying opportunities.