Lately, it seems like everyone is a stock picker. There is a buzz in the air of excitement, greed, and opportunity. Is it because we have been cooped up in our houses for nearly a year now? Are the algorithms on your phone's news feed pumping articles to you of people who paid off their student loans trading GameStop and AMC? Yesterday, I spoke with someone who was convinced that AMC is a "great" investment. "We love going to movies! It is like apple pie, an American institution," he said. He's forgetting that movie theatres have been on the decline for years. Their business has been disrupted like so many other American traditions. Think drive-in theatres, Blockbuster video and video arcades. They are a novelty at best now. I am not saying going to the movies will go away completely, but if you are going to take the risk of a single stock, look toward the future, not the past.
Don't get me wrong, I love the energy and opportunity, but there is one big element that is missing in this. People are not putting themselves in the position to take risk. It's like gambling your rent money and hoping for the best. Not a good recipe for success. You could get lucky and some do, but the reality is most don't. Most are too late to the party and pay the price. So if you want to take a risk, ask yourself this first:
- Do I have an adequate emergency savings? Typically this is 3-6 months of your bills in cash, though it can vary based on your circumstances and risk tolerance.
- Do I have bad debt (credit cards, personal loans, high interest car loans, etc.)? Realistic long term returns are nowhere near the cost of carrying this debt. Bad debt is such a boon to creating wealth you would be much better off paying your debt. Not to mention the freedom you will feel when you do pay this off.
- Am I saving enough for my future? Through proper planning you can find this number, but typically at a minimum you should be saving 10% of your take home pay.
- What percent of what I have am I willing to take a total loss on? We recommend no more than 2-4% of you total liquid net worth should be used to take such high risks on.
- For the amount I am willing to risk, how many hours would you have to work to recoup that money? Remember, you still have to pay taxes on your earned income too.
If you haven't gone through the experience of total loss of money, you won't know how low the feeling truly is. The humbling experience of getting knocked down a peg or two teaches you a lot. One important lesson that our firm teaches is that wealth building and preservation is a methodical system through diversification of investments and proper planning. The old phrase "I much rather be lucky than good" is a great one, but the reality is that at some point luck runs out. Put yourself in the position to take risks first and make sure it is measured.