5 Dangerous Investing Strategies That Can Deplete Your Life Savings
By: Marc Guberti
Tags: Work, Business, Money, Stock Market, Investing

5 Dangerous Investing Strategies That Can Deplete Your Life Savings

Avoid these strategies for your own good

Investing is commonly presented as the path to wealth. While this is certainly the truth, there are a few investing strategies that can leave you in a world of hurt.

Some people use the wrong investment vehicles in the wrong ways and end up losing everything. To avoid this fate, it’s important to consider your portfolio objectives and the investment vehicles you utilize.

Most people’s portfolios don’t give them the sufficient capabilities to make these mistakes. However, as we get tempted by shiny objects and stories about other people’s returns, it can be tempting to pursue high risk assets.

Here are five of the common and dangerous investing strategies that can burn a hole through your wallet.

#1: YOLOing With Options

The YOLO is a new investing approach popularized by the Wall Streets Bets Reddit Group.

The premise is simple. All of the money in your portfolio gets put into calls or puts of a single stock.

Calls and puts are a form of leverage. I recently bought $15 calls for Perion stock which are set to expire on January 15, 2021. So far I am happy with this initial investment as Perion stock has performed well lately. In a single day, I doubled my entire investment.

But what if Perion went down and doesn’t get anywhere close to $15? The options expire worthless. All of the money put into those options would vanish from the portfolio.

Initially, my PERI stock options represented less than 0.25% of my portfolio. It now represents a little over 0.50% of my portfolio due to Perion stock’s recent surge.

In the event the PERI options expire worthless, it’s not devastating to my portfolio. If you YOLO and your options expire worthless, you literally start back at $0.

People are attracted to the YOLO because you can very quickly add extra 0s to your portfolio if you get lucky. But bad luck can take years to recover from.

#2: Putting All Of Your Money Into 1 Growth Stock

When you find a growth stock, and you’re convinced it will take off, it’s tempting to invest most or all of your money into that one stock.

The logic is that since this 1 particular growth stock will take off more than all of your other stocks, you should just fully load up on that stock.

This stock will become your life. You’ll panic at the slightest dip in stock price and be excessively happy on any upward motion. You’ll aggressively oppose anyone who says anything bad about your “golden” stock.

2% drops will feel like crashes and 2% increases will feel like Bitcoin’s 2017 run.

Not only will it play with your mind, but growth stocks don’t sit still. It’s normal at some point to see a 10–20% drop within 1–3 days for no good reason if you’re invested in a growth stock.

Roku had a stretch when it went from the mid $70s to under $30/share in 2018. It happens, and you can more easily weather the storms with a diverse portfolio.

This pill would have been much harder to swallow if Roku was the only stock in your portfolio.

I generally get cautious when a position exceeds 5% of my portfolio and do a hard stop when a position exceeds 10% of my portfolio.

#3: Shorting Stocks

You can make money shorting bad stocks, but the potential gains you can get from shorting stocks aren’t worth the danger of unlimited losses.

In a short, you borrow shares and sell them to the open market. You must eventually repurchase the entire position to close it.

When you short a stock, you hope the price will plunge so you can buy back the shares at a much lower price.

If you sell shares of a stock at $100 per share and buy them back at $80 per share, you make $20 per share.

However, if you sell shares at $100 per share, and the stock price jumps to $200 per share, you’re in trouble. You’d lose $100 for each share your shorted.

But this gets worse because a short position can play with your mind.

In the previous example, let’s say you decide to wait it out. You believe the stock is overvalued at $200/share and should go back down to $100/share soon.

What if the stock hits $300? $500? $1,000?

You still have to buy back the shares to close your short position…and pay interest while you’re shorting the stocks.

As overvalued as electric vehicle stocks have become, I’ll never short Tesla or Nio stock.

The crowds can push those stocks up even higher, and the market can remain irrational longer than you can remain solvent.

There are other ways to make money in the stock market that don’t involve the risk of unlimited losses.

#4: Playing With Margin

At first, margin seems very attractive. You get double the cash invested into your positions which means double the gains. Instead of going up 1%, you go up 2% instead.

Margin also allows you to buy additional stocks you probably couldn’t buy without the margin.

However, margin carries a significant risk. Just as a 1% increase becomes a 2% increase, so does a 1% decline turn into a 2% decline.

And if your portfolio drops to a certain level, your broker can act on your behalf and liquidate some of your assets to pay off the margin loan.

I believe it’s better to focus on making extra money than playing with margin, especially with the risks involved. And greedy investors usually get burnt the most from margin when the stock market doesn’t go their way.

Margin isn’t all bad. If you have a big purchase coming up but don’t want to sell any of your stocks, you can enable margin for your account and use the margin cash instead of selling your shares. This allows you to enjoy the upside of your stocks and make a big purchase without having to sell your shares.

Margin is a loan, so you will have to pay it back, but for some people, it beats having to sell the stocks. For some investors, holding onto the shares rather than selling them will also be significant for tax purposes.

#5: Not Investing At All

If you do not invest, you are guaranteed to lose money. The cash sitting in your bank account loses purchasing power each year due to inflation.

You also miss out on asset appreciation and getting your money to work for you instead of the other way around.

Investing can seem scary to someone just getting started, but you have to take the leap. Buying stable blue chip stocks or an index fund are two great ways for most people to get started with investing in the stock market.

Once you get the hang of it, you can get more creative, but you have to start.

Want to learn how to make money investing in the stock market? Make sure you subscribe to my YouTube channel

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