How much should I put into risky investments?

Today’s question comes from Tamara. She asks:

I don’t have much invested in the stock market at all. I just started messing around with an E*TRADE account this year and otherwise I just have a pension with the state of California (currently full-time state employee at $6,300/month), two rental properties (net $1,800/month and maybe $150-200k equity), a little cryptocurrency ($6k), actual gold/silver ($3k), scholarshare ($200k), no-matching 453 plan ($5k), and emergency fund ($25k). I bought the rental properties last fall with money from sale of my home. One has private financing and both are around 4% interest. I’m renting a home by my boys school. I don’t have any debt except an RV I’m selling.

I’m 40 and recently divorced with two teens and a full-time job. I’m an environmental scientist and have a masters. I have studied ecology and economics and history and anthropology on my own and through school. Feel like I have really good handle on finding patterns and being logical and love research. I just started learning macro economics and stock market this year.

My dad is a self-made millionaire but he and I both agree it’s better for me to make it on my own so I will get inheritance but want to make my own wealth. He made his off saving, not taking out debt, owning a construction business and municipal bonds. Not a risk taker.

Perhaps because my father is SO conservative, I am more of a (calculated) risk taker. I realize the dangers of penny stocks and shorting market, but I invested in some penny marijuana stocks this month in my E*TRADE account as well as commodity funds and market shorting ETFs. I know there are no crystal ball, but my intuition is usually good and I’ve studied patterns in life enough to feel there is a good chance of a domino effect sort of global economic collapse in the next year or two. Likely starting with something political/technological or crypto currency failure.

I’ll put my tin hat on and also admit I want to invest in silver coins, food storage, water, solar, gas, guns, etc. Beyond that I want to put myself in a safe position to attempt to make some money on things that are undervalued now but will be valuable in the collapse. My best friend calls me an “askhole” since I ask questions and then proceed to do my own thing anyway, but other than relationships it’s always worked out. I was just curious if you had any ideas for quasi-risky moves to take advantage of the impending changes in events. I would like to invest $5-10k of my savings in these risk taking adventures.

I have had great luck with making money off real estate and sweat equity, but have lost it in two divorces and being too proud to accept child support or other help. Not much of a fighter, but at least I saved lawyer fees and kids are great.

The reality is you should focus on real estate. It’s what you know, where you’ve built a skillset. But you’re not going to want to hear that because you want to be investing in everything.

There’s nothing wrong with investing in everything. After all, that’s how Richard Branson became a billionaire.

He started Virgin as a record company and it’s now a huge conglomerate involved in industries like aerospace, banking, mobile, healthcare, hotels, and a million other things.

Branson is a classic example of “success because you’re too naive to know it’s impossible.” Flying by the seat of your pants and taking risks and getting lucky.

And that approach is wildly different than a very linear approach someone like say, Warren Buffett took to become a billionaire.

Buffett’s methodical approach was to invest in stocks and then hold them forever. When his company Berkshire Hathaway got big enough they started swallowing entire companies.

This is a left-brained tortoise approach to Branson’s right-brained hare approach, but since they’re both billionaires it’s hard to argue one road is better than the other. Just different roads to the same destination.

In fact, you and your dad are examples of this duality. He made millions owning a construction business, spending less than he earned, and investing conservatively.

I didn’t count the number of things you’re invested in, or thinking about investing in, but it’s a lot. And investing in lots of things can work too, but if you’re investing in lots of things it’s important to benchmark yourself.

Most people who buy investments haven’t a clue how they’re doing. They trade in and out of stocks, likely racking up fees and taxes, and if you were to ask them, “What’s your compound annual growth rate?” they’d look at you like you’re from Mars.

Here’s how I do this. I’m invested in an index fund plus a basket of stocks. The reason I’m invested in the stocks is because I think over the long term they’ll collectively outperform an index fund that tracks the market.

That’s the whole point. You buy stocks because you want higher returns than the market, and if you want higher returns than the market you need to measure yourself against “the market.”

And a decent proxy for the market is the S&P 500 index. It serves as your benchmark, because it’s the average return of an investor in the market.

So every month you sit down and calculate your performance, to measure it against your benchmark, the S&P 500. Over shorter periods of time, like 12 months, you might not match the results of the market. That’s okay.

Too many investors focus on calendar years and naturally end up making poor investment decisions trying to outperform the market every 12-month period. Ironically, it’s why so many investors and fund managers underperform their benchmarks.

What’s truly important are your results over rolling 10- and 20-year periods. Like Buffett said, “Charlie and I would much rather earn a lumpy 15 percent over time than a smooth 12 percent.”

It doesn’t matter if you occasionally underperform the market, what matters is that in the long run you crush it.

However, if you discover you’re consistently underperforming it’s probably wise to shift your strategy to index funds. Like the saying goes, “If you can’t beat the market, be the market.”

With that said, there’s no one-size-fits-all for investing. You need to invest the way that fits your personality best.

You’re good at real estate because you’ve built that knowledge and gained the experience. This is your circle of competence, and so you might get better results with property than investing in a lottery of new things.

It’s fine if you want to invest small amounts of money in those things to try them out. A good rule of thumb is to allocate between one to five percent of your net worth, and then start tracking your performance.