Too Hot Investment Thread

Is that 100K the total of available cash? If so, I would personally*:

1) Set aside a $5K emergency fund.
2) Pay off any high interest debt I might have (excluding mortgage or low-interest auto loan given current inflation).
3) Set aside 3-5 months months worth of living expenses (depending on the stability of my work situation). This reserve could include the Emergency Fund from step 1.
4) Invest the rest as follows:

• a. 90% in low-cost (less than 0.15% Expense Ratio) index fund or ETF for the Total US Stock Market. S&P 500 would also be fine.
• b. 5% in either TIPS or a Total US Bond Market fund
• c. 2.5% in BTC
• d. 2.5% in ETH

That's what I would personally do with 100K cash and no immediate needs for the money over the next 10+ years. How I did step 4 would depend on more detailed factors like if I already have contributed to Roth IRAs for the year, etc.

 

I mostly agree with Jhenderson, I think the other pieces of the puzzle are:
Your risk tolerance. Some people hate to see money lost, even if it’s temporary, some don’t care. A target fund is usually a good compromise there.
How important that 100k is to your future plans. If it’s critical, you will need to handle it differently than if it’s just “extra” money. How much more conservative you are with it would depend on how important it is to your future.
Do you think you’ll need to touch it before 10 years? If not a Roth IRA (if you’re not already maxed out and qualify income wise) or even the high interest Ibonds are a good start on it.
If you are already in decent shape on other things like retirement, college funds etc, it might be a good chance to start thinking about estate planning, if you haven’t already. Setting up trusts for family and getting them off the ground with some basic funds as mentioned above.
But good luck with it.

 

Good suggestions although I might consider some international exposure as well.

 

I certainly wouldn't fault anyone for allocating up to 20% of their equities exposure to international in something like a total international stock index fund.

The last 14ish years haven't shown much value in international stocks, though, either from reducing risk or increasing returns, compared to the 1970s thru early 2000s, and the largest US companies do so much business internationally that just owning them gives you exposure to global economies.

 

No offense to any of the great advice on the 100k. But concentrated positions create wealth and diversification preserves wealth. I’d go all in on a beaten down tech stock or go real crazy and buy Ethereum.

 

Sounds like a great way to part with $100k. By the way your first sentence is not accurate.

 

What is inaccurate about the sentence? No good advice in the thread?

 

Concentration of position doesn’t create wealth. It creates risk and a wider dispersion of outcomes. Diversification reduces risk for the same average/expected return.

 

Well I was talking about creating wealth. How many people do you know that have created wealth, true wealth [10MM] plus, via a diversified portfolio starting with 100k? I work with HNW and UHNW families. None of them generated that wealth by diversifying their portfolios. They generated that wealth by making concentrated bets or honestly inheriting it from someone who made such a bet. They now “preserve” that wealth via diversification.

 

Yes but what does that have to do with the first sentence?

 

That is true, but that doesn’t necessarily translate to blind risk makes you wealthy. Those business owners took calculated risks that ultimately paid off. It probably wasn’t a random thing. If you pick one stock and put all of your money in it, and it goes up, that is luck. Not much different than taking a high risk bet at the casino.

Not many people get rich by putting all their money in one stock either.

Plus there are structural aspects about starting a business that increase your odds of success. Ultimately if you fail the business can go bust and declare bankruptcy and you don’t necessarily have to lose everything you have. If you bet everything on one stock and it tanks the money is gone.

 

I was speaking of concentration of wealth. I guess technically that was second sentence.

 

So the bear market lasted about 3 hours.

 

Yeah, and plenty of people compile 10+ million net worths via diversified stock portfolios. Roughly 55k per year for 30 years growing at 10% puts you there, not even counting real estate.

 

i don’t think many people do or experience what you have just described.

 

Many is relative. A median household obviously can’t save 55k a year, but there are millions of households that earn enough to sock away that kind of cash between 401k contributions, company matching, and brokerage investments.

The point is, you don’t need to load everything in one high risk investment to have a chance at “real wealth.” Earn a decent income, live within your means, and invest responsibly, and you’ll almost certainly retire with millions. The more you earn/save the more millions you end up with, but at no point do you need to bet it all on one horse to build wealth.

 

I do think there's something to the point that overly diversifying can dilute returns, though. For example, many 1st generation millionaires own their own business which is where much of their net worth exists. A more broad and accurate statement would be that diversifying for the sole purpose of reducing risk will also most likely reduce returns over the long run.

But the only way I could ever envision throwing even close to 100k into a single "beat up tech stock" or other high-risk asset would be if that 100k was less than 2% of my total investments...

 

Diversifying increases average expected returns for a given level of risk.

What you're talking about is reduced variance. For example, if you bet the house on a speculative tech stock, you have a very wide range of potential outcomes--or high variance. At a 95% confidence level, your returns might be anywhere between -100% to +500%. Totaling all those possibilities together, you might be able to calculate an average, or expected, of say 15%.

Now lets say you add another stock with the exact same risk profile, -100% to +500% with an expected return of 15%. Mathematically, what happens is your expected portfolio return goes up and your variance will go down. So, even though your two assets have the exact same level of risk and expected return, combined your expected portfolio yield may now be -70% to +380%, with an average of 17%.

Essentially, diversification gives you better average returns, with more certainty, at the cost of reducing your best-case-scenario upside.

So, although someone who put $100k in APPL in 2000 beat the pants of the market and became major millionaires, the average person who invested in individual stocks like Apple lost out compared to people with more diversified portfolios.

 

But to my point, if someone had dumped 100K in AAPL in 2002, that 100K would be worth ~17M today, vs. 9.9M in the NASDAQ or 3.6M from the S&P 500.

 

agree, but aapl is also the 1 in ten thousand case as far as stock appreciation. For every apple, there’s countless others that go nowhere, or worse. I learned my lesson playing in small caps that way, I had one winner, three or four losers, lost 70 percent of my money and said never again- it was only 7k or something I lost, but at the time that was a lot to me. And it was clear I wasn’t getting rich that way . It’s been wide diversification for me ever since. And my experience is far more typical than the person who guesses right on an all time great stock. Something like less than 10 percent of day traders actually make money for instance. It’s hard to outsmart the market.