Do you invest to get rich or do you invest to avoid being poor?
If the latter, why would you put in all that effort just to avoid a bad outcome? Isn’t the point of investing to maximize return rather than simply minimizing risk? But there’s more to the idea than a binary financial outcome.
In one of his latest podcast, “Masters In Business”, Barry Ritholtz speaks with Meir Statman, a finance professor who studies investor behavior and financial decision making. According to Statman, the behavior of individual investors can be organized into two buckets:
The “Get Rich” bucket
The “Don’t Be Poor” bucket
These buckets fall along a simple risk curve. If a person invests to get rich, they’re leveraging their money to make even larger sums. These investors are willing to take great risks to achieve a bigger financial outcome. These investments might include angel/venture capital, private equity, collectibles, crypto, day-trading small-cap stocks, emerging market bonds, etc. It’s higher risk/higher reward with a lot of volatility along the way.
On the other hand, if a person invests to avoid being poor, they’re leveraging the assets to protect their money. Instead of striving to make as much money as possible, these investors are working to lose as little money as possible. And, they’re willing to sacrifice higher returns in exchange for lower risks. These might include index funds, certain real estate assets, blue-chip stocks, T-bills, and positive-cash-flow stable businesses.
So, this got me thinking about my behavior as an investor. To be an angel investor, you have to have a substantial risk tolerance. But, it doesn’t take a lunatic to get rich!
Personally, I invest ~ 50% of my investable capital into opportunities that fall into the “get rich” bucket, and the other half of my capital into the “don’t be poor” bucket. It’s this balance that feels right to me. But EVERYONE is different and does this same “risk accounting” in their daily lives.
So I’m curious: How do you balance risk in your own life? Which bucket do you fall into?
The “Masters In Business” podcast does a fantastic job of explaining this concept in depth. If you want to learn more, I linked the episode below.