Some Thoughts on Taking Calculated Risks Early in Your Investing Journey
When starting out in investing, the level of risk one should take depends on one's long-term goals, personal circumstances, and risk tolerance.
While conventional wisdom often promotes diversification, I believe that in the early stages of wealth-building, a higher level of concentration can be a rational approach—especially if you have significant future investable cash flow.
Imagine a 25-year-old investor with an initial $10,000 portfolio and the ability to invest $15,000 per year going forward.
Running a highly concentrated portfolio—perhaps just one or two stocks—may seem aggressive, but viewed in the context of a long investing horizon and steady future contributions, it becomes less risky than it appears at first glance.
This investor is not just YOLO-ing his initial $10,000 net worth; he is making decisions knowing that they will have HUNDREDS of THOUSANDS of dollars to invest over the coming decades (keep in mind that he'll likely be able to invest larger amounts over time as his income rises).
A single bad investment will not (significantly) derail his long-term progress, whereas a well-placed bet on an exceptional business could meaningfully accelerate the wealth-building journey of this young gentleman.
Early on, an investor can afford to take big swings, especially in areas where others are not looking—such as small or micro-cap stocks.
The return potential of these investments is often significantly higher than that of large, mature businesses with well-established moats. However, the tradeoff is a wider range of possible outcomes, from 100x returns to total capital loss.
Which brings me to the point of this post which I'm actually trying to make: …