How to Sleep Well, With Risky Investments
There are so many types of investors and different approaches to make money. But how do you go about doing this while not losing your shirt? I will touch on some principles that can give you more piece of mind when investing in newer vehicles (crypto) or what we call in the financial services industry speculative investments.
First, and most important principle you can never go wrong with is. Do not invest any money that if you woke up tomorrow and it was completely gone would affect your ability to provide a means for you and your family. This means anything that you currently keep for an emergency fund, a mortgage payment, utility bills, food, or transportation to/from work. Money for investing needs to be separate from those items if you want to be able to live with yourself should an investment go wrong, and they will if you are in the market long enough. No matter how much you think a company or investment will payoff remember the only person who was ever perfect is seated at the right hand of the Father. So mistakes will be made and that’s ok. I think of each of these moments as something that I can learn and grow my investment strategy to minimize those risks in the future.
Second, never invest in something that you do not understand. This could span a number of things from ETFs, Stocks, Options, Crypto currencies, Real Estate, mutual funds, really anything that you can put money into that you do not understand how you will get a return on your investment. So many people think that they have to use a complex investing strategy or something they might read about in a book. But putting that into practice can be much more challenging than just being able to understand the concept.
To me there is not a one size fits all model to investing and just because you don’t have $50-100K doesn’t mean you can’t invest and grow the money that you do have control of. But a trap I have seen so many people fall into including myself in the past is well I only have $100 to invest let me pick a penny stock that I can get some bang for my buck. I want you to try and fight this urge, while this approach can be lucrative penny stocks do not fall under the same regulations that a stock does that is on and exchange. These are generally called over the counter (OTC) stocks and they generally are under a $1 thus the reason for the name penny stock.
Another approach that will help if you choose to make an investment in a speculative stocks is to minimize the % of your overall portfolio to somewhere between 0-5% and invest the remainder in a combination of mutual funds, blue chip stocks, real estate or something that has a longer track record and some sort of regulatory body that keeps most people from losing their entire investment in the blink of an eye. Don’t get me wrong every stock or investment has an associated risk. Just think back to an energy company called Enron that rose very quickly only to lose everything. This company lost billions of dollars in the course of a few short years and with it so many employees’ entire retirement savings vanished as quickly as they were made.
Investing is an art form and one in which I believe to be crucial to generating financial freedom. You hear it sometimes this person picked this stock and that person picked another and they made massive returns in the 1000-10000% return range and you see the dollar signs and it can cause us to be emotional and to dive in without doing the proper research. One of the things that I hang my hat on when selecting any investment to put my money into is what I call “homework” others call it due diligence, and some others call it analysis. But whatever you call it this is where you find the good and the bad of any company. Whether that is combing through the different parts of a Cash flow Statement, Balance Sheet, or Income statement to find out where and how the company is spending and making their money. Or getting deep into the 10-Q and 10-K that come out for those companies who are regulated and on exchanges.
A major problem with today’s world is there aren’t a ton of good games to be found right now. And you ask yourself what are you talking about Mike? Today there isn’t a great conservative option out there for those on the back end of a career or just looking for something to guarantee the money they have. You could dabble in High Yield Bonds those generally are high yielding because the Moody’s or S&P has them rated as a lower grade company. So to entice people to invest they have to give them more yield or higher interest rates. The problem with that is today rates are very low across the board a 10 year Treasury bond is currently around 1.63% which in the long run you will lose money due to inflation. And those companies who were once upon a time paying 10-11% on what is known as a junk bond can get away with 4-6% and you still garner all of the risks of the company defaulting.
I can talk investing in any way shape or form you want to cut it, but you have to understand that there is risk involved. Some people take the approach of being very conservative with the risk palate they select by only investing in companies that have tons of cash such as Apple or Alphabet (better known as Google). Or you can take a more risky approach where the returns are typically higher however the crash will generally hurt much worse than that conservative risk you took.
There is never a time when you should get mad at yourself for taking profits off the table. A rule of thumb I try to live by is every time my investment goes over 100% I take some of the profits off. If it goes to 200% the same thing, 300% and so on and based on what you have invested this could be taking 10-20% off at each of those clips and letting the money continue to ride or taking your initial investment out and letting the proceeds earned ride on. However, you choose to approach this you have to remember that cashing out to soon and making money is a whole lot better than crashing out and losing everything.
However you look at your investing be sure that you remember these principles:
1. Never invest any money that you need to live.
2. Don’t invest in vehicles you do not understand.
3. Figure out your Risk Palate and stick to it.
4. Invest no more than 5% of your total portfolio in speculative stocks.
5. Learn how to do your own due diligence “homework”.
6. Speculative investing is like a wild child it could go up 100% or down 100% in the same year.
7. Last and certainly not least “Never be afraid to take profits off the table”