A few days ago, my son excitedly texted us saying his 24-year-old buddy had invested $8,000 in AMC, and it was now worth $24,000. The delighted buddy offered the whole friendship group a vacation on him! The next day, as the AMC stock price dropped, the vacation went up in smoke.
This friend was one of possibly millions of people involved in an investing frenzy sparked by Reddit users in late January. It has sent GameStop, AMC and BlackBerry stocks on a wild ride.
Magic money is one of the worst things that can happen to an investor. Experiencing it can make us search for more magic money, taking risks along the way and bypassing investing disciplines that are likely to be profitable over time.
It is a bit like my hole in one in golf — If only I could find that magic again! Or, as magic money crashes, it can sour us on investing, to our long-term detriment.
I remember client experiences before and during the Tech Bust of 2000 to 2002. One prospective client saw his initial investment of $600,000 grow to $1 million over a few short months. Excitement reigned! A year later, $300,000 remained.
A joke I often make with clients who decide to invest some monies speculatively (generally outside of our offerings) is, “The worst thing that can happen to you is that you do well.” My perception is that they smile and take my meaning.
What if you want to speculate or invest for aggressive risk/growth? What if you find an opportunity you think is exciting? Here are three steps for moving forward without “losing your shirt.”
1. Determine your serious money vs. your fun money. Serious money is earmarked for goals that are important to you, such as an emergency fund, debt repayment, financial independence, or education. Fun money is the excess beyond that.
2. Invest serious money seriously. Your financial advisor can help you with strategies.
3. If you wish, go ahead and take a flyer with fun money. Try some things. You can learn and experiment while not putting yourself at too much financial risk.
If you find some magic, remember that it just might be the worst thing that happens to you as an investor!
Laura, the founder of LWP, is a Senior Wealth Manager, Chief Investment Officer and Shareholder. She has a master’s degree in tax and is an excellent listener. While she is a sophisticated financial planner with experience in complex issues, her priority is ensuring a financial plan works for people.
