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How To Get Rich When Everyone Else Is Afraid To

23 May 2008 2 Comments

We live in a very risk averse society. Financial planners recommend a well diversified portfolio. Career counselors provide advice to achieve job security. Relationships often fail because one participant avoids putting himself or herself “out there” to give it a chance. Oh yes, we are taught from an early age to avoid risk. It is inherent in all of us.

The reality is that if you are not willing to risk anything, then you likely are not going to gain much either. However, risk too much, and you might wipe yourself out. Physically, emotionally, financially, etc. How, then, can we risk enough to achieve large returns while minimizing potential losses?

Diversification… What A Silly Word

In the world of investing, surely the most common investment strategy is diversification. Isn’t it funny how the investment community is too good for the word “diversity”? They had to make up one that sounds more official: diversification.

In my short investing career, I avoid diversification. I find it hilarious how many active investors are out there (by active I mean those continuously researching to find new stocks) that are attempting to build a diversified portfolio. If diversification is your goal, there is no need to be an active investor; just put your money in an index fund that tracks the broad market. You’ll earn a nice little return over the long run.

Achieving a “nice little return” is not my goal. Frankly, my goal is to knock it out of the park, financially speaking. To get to that ambitious goal, I’m willing to take some hits along the way.

Is There A Way To Bet Small and Win Big?

Sure, it’s called the lottery. The only speculative move that has low risk with a potential big payout are bets that are similar to the lottery. By accepting such low risk, you are also accepting odds stacked against you so high that you’re basically throwing your money away.

The Disadvantages Of Diversification

The diversified portfolio consists of smaller bets in many different stocks or other investment instruments. It means you’re not very confident in any of your investments so you make a bunch of bets hoping more will go up than those that go down. At best, your portfolio might gain with the market. Often times, your gains are canceled out by your losses. Frequently, you did so little research in any of your investments that most of them are poor decisions and your portfolio loses money.

Calculated Risk, Calculated Return

What do the best poker players do when they feel the hand has turned in their favor? They bet more. On the flip side, what do they when their cards suck? They fold. Oh my goodness, they should diversify!!! How silly would it be if they bet the same amount each time no matter what the “poker environment” had become? Why then as investor would you bet the same amount on every bet in your portfolio simply for the sake of diversification.

My goal, as an investor, is to ruthlessly research and find a handful of the best investments and to bet big on them. Typically, this is one to three positions. This takes a willingness to lose money and a drive to follow the markets and research individual companies. If you aren’t willing to do both then you are better off going the index fund route I described above.

If you are willing, you give yourself a chance to achieve huge gains. Are you willing?

It Is Never Wrong To Take A Profit

If you employ this strategy of risk and reward, you should always remember to take profits when possible. Because you stand to lose more, when you do make money, take profits. It is very easy to get greedy and watch our investments go up and up and then down and down. Don’t fall into this trap. Take the cash that you earn.

Young People: Hit A Home Run

If you are in your 20s, what do you have to lose? Probably not much. Ask yourself what you would do if the worst case scenario happened: you lost ALL the money you had to invest. Would your life change that much? You’d probably be fine. Now, the older you get with more financial responsibilities, the tougher it can be to add more risk to your investments.

The reality is that you will never get rich off your salary. The people that do are the exceptions. Interestingly enough, a salary is the most low risk part of your financial life. You should view your salary as one small part of your overall financial picture (read about this further in my Four Pronged Strategy Towards Financial Prosperity). Investing in equities, starting a business, all require you to accept a level of risk. If you want your investment portfolio to be a bigger part of your financial picture, maybe it’s time to step up the risk and bet bigger on your favorite stocks.

Remember, diversification is just a word somebody in a suit and tie made up to sell more financial services. If you want to get rich, you have to risk your money. Do your research, find the best investments, and pull the trigger on only the best ones.

2 Comments »

  • Paul | UpperMoney.com said:

    It’s funny how so many people dream, yet never DO ANYTHING to achieve their dreams! (Apart from buying the occasional lottery tickets).

    Personally, I’m not into stock investing just yet, but I’m running some businesses online, which I view as investments which can grow over time, but with less of a downside than a traditional stock investment.

    I just like stacking the odds in my favour, that’s all 🙂

    Thanks for the inspirational article.

    Paul Hancox