How spicy should you make your portfolio?
Caution: contents are hot 🔥 🔥 🔥
Not sure if you’re like me but I loooove a little spice in my life. Whether it’s chilli oil on my toast in the morning, in the bedroom 😜, or with my investments - I love spice.
And so should you! OK, maybe not the bedroom or chilli oil part, but when it comes to your investments a little spice can be a good thing.
When I talk about ‘spice’ I’m talking about the riskiness of your portfolio. I’m talking about those stocks that are up one minute and down the next. I’m talking about Netflix and how it fell 70% in six months, then rose 100% the following six months. I’m talking about high risk assets like stocks.
Spice doesn’t always have to burn either. If something is high risk, it’s usually high returning too. This means your investments will grow much faster and you won’t have to do as much of the heavy lifting. But there is one caveat….you MUST hold these investments for many many years. And not just 2 or 3, we’re talking 5, 10, even 20 years! The longer the better!
When you hold investments for a long time, you’re not selling out when they’re low, or high, you’re riding the wave regardless of what the stock market is doing. Investing in stocks is volatile - it’s guaranteed that stocks will boom and bust, but over a long period of time the stock market goes up and to the right. I.e over a longer period of time, stocks are always worth more.
Take the above Netflix example. If you only held it for a short amount of time, you might’ve taken out your money after the first six months and lost 70%. Whereas if you held it for longer, you would’ve got a 100% increase. But what if you don’t have a long time to invest? Or you’ve nearly reached your investing goal? You can still have some spice, but just a little.
If your investing goal is retirement, and you are 30 years away from that, you can afford to have 100%, or most of your portfolio, in spicy (aka high risk) investments. However, fast forward 25 years and you’re now only a few years away from retirement… it’s at this time that you should be adjusting your spice level - maybe go from ‘hot’ to ‘medium’.
This could be by investing more of your portfolio into low risk investments like term deposits or bonds. Then as you get super close to retirement, you might go for a ‘mild’ portfolio so you can preserve the amazing money that you’ve made over the last 30 years; invest all of it in cash or bonds.
It’s best to think of your investing journey as a spice scale; when you’re young, you can have lots of spicy investments, but as you progress closer to needing the $, think about protecting what you’ve grown by investing in ‘cooler’ things. That way, you won’t be burned by the market.
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