Conventional wisdom tells us to not to risk money. Conventional wisdom is wrong sometimes.
Note: This post is about SPARE money. This is money that you might have otherwise spent on a TV or new clothes. This is NOT your rent money or food money. If you risk money you need to live off of, you’re an idiot. 🙂
It isn’t always a terrible idea to be conservative with money, like when you’re three years away from retirement and will have enough to sustain you. But I see the “responsible” twenty-somethings putting all of their money in a savings account. This is stupid. The time to take risks is when you’re young and you can scale back on risk as you near retirement.
I plan to get some work soon – maybe on a per-contract basis. As I earn money, I’m going to invest it aggressively in the stock market and in myself.
Risking Money With LEAP Options
I love the LEAP option. It allows you to claim a stake in a company for much less money than the underlying stock price for up to two years. The downside to options is that they expire eventually and you could lose all of your invested money. I won’t get into the details of option investing (that would be several long posts), but the LEAP option is a great way to take smart risks.
In 2009, I purchased an Apple LEAP call option when the stock was at $120. The cost was $2,000 and I sold it a couple months later for $4,000, doubling my investment. But if I had held on for another year, I would have been able to sell it for $20,000 (a mistake I have learned from).
If I had held on to that investment and made NINE other investments of the same amount that became worthless – I would still break even. It is highly unlikely that all of the other nine would fail. The reason this strategy works is the same reason that being willing to fail is the key to success. I may lose on 80% of these investments, but the successful ones like the Apple LEAP option are going to more than make up for the losers.
Bet On Yourself Too!
It is smart to diversify a high risk/high reward plan like this. I recommend investing in yourself. I’m investing in this blog (i.e. myself) because I believe in what I’m doing here. I also may start other websites/online businesses that have potential to support me financially.
Given how passionate I am for what I’m doing, failure in most of these ventures is unlikely, but I can still afford that if some of them succeed. Investing in your own abilities has much greater payoff and satisfaction potential than any stock option investment. Some people have started blogs and websites as a hobby and now live off of them. All they did was enter the game and it paid off.
WARNING: This Is Not For Everyone
When you work for a company, you agree to turn over any value you create to that company. The only thing you retain when you leave is the money you’ve earned (pensions are rare these days) and the experience to put on your resume. So when you’re 60 years old, you had better have some money because you haven’t created value for yourself, but for someone else. This route in life is perfectly acceptable, but it plays by different rules.
You can’t be very risky in this case because you have no value to fall back on. Your value is tied up in the job. Imagine value as being clothing – once the job is removed, you’re naked with a nice resume. On the other hand, if you have your own business, you can sell it or let others manage it as you continue to profit. If you have a blog, you can sell it or continue to generate passive income from it.
But This Could Be For You…
The reason that this is viable for me is because I’m working on building things (such as this blog) that have permanent value. The content I write is timeless for the most part. I didn’t write about the royal wedding in late April 2011. I wrote about why multi-tasking is killing your productivity. The wedding is old news already and my article can provide value to readers 30 years from now.
I’m just getting started and I know that in twenty years I will have created a good deal of permanent value in my blogs or businesses. This makes it easy for me to risk spare money that I have now. If I were just trading my time for money at Corporation X and counting on that to support me in retirement, I’d risk considerably less.
Once you build permanent value by blogging or writing a book, you can earn passive income because your content can provide value long after it is created. This is what makes video games and movies work – they take a lot of work, effort, and investment to make initially – and here we are still watching Gone With The Wind 70 years later.
Srini over at The Skool Of Life wrote about the importance of persevering despite not always seeing visible progress and immediate results. This is exactly what you need in the value-creating business. The flashiest objects will be noticed first, but the real valuable objects are the ones that people will be attracted to in the long run (e.g. the internet bubble of 2000).
Ok, But WHY Risk Every Spare Dollar?
The rich get richer.
The reason that statement is true is that money represents freedom and options. If you have a million dollars, you’re able to do a LOT of things to grow your wealth that you can’t do broke. The only ways to gain a significant amount of money to work with are to take smart risks that pay off or to slowly build up wealth. I recommend the former for people like me and the latter for people working the 9-5 to provide for them.
As in the Apple example, it is easy to see that smart risks can pay off handsomely. In a paper trading (fake) account I took a risk on a Google option and made $350,000 from a $25,000 investment in one day – I would never take this risk in real life, but it was interesting! If one of your risks pays off early, you’ll be in great shape. If not, then you have the value you’re creating (and will create) to fall back on.
The truth is that there is no safety net in life/career/money. Those who stuff money under a mattress fall victim to inflation and the devaluation of the dollar. Those who win are the ones who are active and smart with risk-taking. Look at any successful person and you’ll see they took some key risks that paid off.
If you’re terrible at picking stocks/options or don’t know what you’re doing, then I’d recommend against risking your money there. Either learn how to invest, let someone else qualified do it, or don’t do it! I also advise against short term speculation because it is impossible to predict. Longer term LEAP options give us the ability to make longer term strategic selections and offer a nice reward if we’re correct.
Most importantly, I advise everyone to invest in themselves if they can. If you’re committed to making it on your own with businesses or web properties, each failure will be a learning experience that contributes to the one time that you succeed. Become an expert in a field you love and start a website for a consulting business. Start a blog and write about your passions.
You can even do these things on the side as you work your main job. The possibilities are endless – your life is not. Start a deep thinking session and find a way to create value for yourself.
Tell us in the comments what risks you have taken that have paid off (or not) for you!