If you like to take risks with your investments, here are some tips to help you have fun while you invest without exposing yourself to catastrophic risk. Be realistic: For just a moment, picture yourself as an investor doing battle with Wall Street.
If you like to take risks with your investments, here are some tips to help you have fun while you invest without exposing yourself to catastrophic risk.
For just a moment, picture yourself as an investor doing battle with Wall Street. If you are actively taking investment risks, that’s what you’re doing. You may be able to beat the market for a year or two, but you are highly unlikely to beat the market over the long haul. It’s fun to try and over time you’ll likely improve your abilities, so don’t give up. Just don’t put all of your money at risk.
If you like to take investment risks, you may not be getting paid for all the risk you’re taking. The market is broad and assets are priced as part of the overall market. If you are putting all of your eggs in one basket, you’re taking risks without added upside potential. Choose to make many more, smaller investments in different areas and that will help to eliminate the risk you’re not being paid to take.
Quarantine the risk
Risk taking is genuinely fun for some investors; investing becomes a hobby. It can certainly pay better than lots of other hobbies, so it’s not such a bad idea. You may want to separate your real, long term, cautiously invested portfolio from the money with which you like to play around. If you keep 80 to 90% of your money cautiously invested — and keep contributing to your savings in the same proportion, you’ll keep your nest egg growing regardless of what happens with the money you’re putting at risk.
Have caution with options
Investing in options over the long haul has a negative expected return. Options are a zero sum game — one player’s winnings are another’s losses. What’s worse is that the game is rigged: someone in the middle takes a commission so you aren’t even expected to get your money back. Writing naked calls is an easy way to make money until it bankrupts you. (If you don’t know what that is, you’re almost certainly not doing it.) Options offer the same thrill as gambling because they have the same expected return. The house always wins.
Shorting stocks (or other assets), that is the dangerous practice of borrowing someone else’s shares to sell them in hopes that the price will decline and you’ll be able to buy the stock cheaper to cover the loan. Keep in mind that when you buy a stock the old fashioned way, the upside is infinite. There is no absolute limit to how high the stock price can go. You can only lose 100% of your investment in a stock you own. If you short a stock, you flip that relationship upside down. You can lose an infinite amount of money — more than you potentially have, but your upside is limited to the price at which you shorted the stock.
If you have some money, you may be tempted to make investments in startups and real estate. Many professionals in these areas have lost money — lots of money — by making bad investments. If you’re just starting out, find a guide who won’t be making money off of you to help you make wise investments.
If you’re an investing daredevil, these tips will help you avoid a catastrophe even while you continue to invest a portion of your portfolio for fun. Remember, your family is counting on the investments you make to provide for retirement and college. You have a responsibility to make sure that money is there.
Devin Thorpe, husband, father, author of Your Mark On The World and a popular guest speaker, is a Forbes Contributor. Building on a twenty-five year career in finance and entrepreneurship that included $500 million in completed transactions, he now champions social good full time, seeking to help others succeed in their efforts to make the world a better place.