Shooting for the moon as a young investor

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eurobogle
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Shooting for the moon as a young investor

Post by eurobogle » Tue Oct 03, 2017 8:50 pm

Thought experiment:

Suppose that you are a young person who has decided to make a single large bet on a risky proposition with a potential quick ~20x return (like this poster). If it goes well then your return may be life-altering e.g. freedom to choose from more personally exciting career trajectories. If it goes poorly then, well, you had your chance and now it is time to click on "Getting Started" and become a good Boglehead.

Question is: what "investments" should such a person consider? Goal is something that returns quickly, has large upside, and has bounded downside (e.g. lose everything invested but not more than that.)

One possibility would be a private investment opportunity like in the thread referenced above. The upside sounds good: ~20x return in three years. There are major downsides though: it is impossible to accurately assess the risk/return ratio, can still take longer than expected to liquidate, can require time and attention, can escalate with follow-on financing requests, can degenerate into legal battles between investors and management, can damage relationships, etc.

An alternative would be to place one bet in a casino. Pick one or two numbers on the roulette wheel, place your bet, have your outcome within minutes. This seems attractive in that it is instantaneous, the probability distribution of outcomes is transparent, and it is reasonably efficient (assuming a gambler-friendly regulatory and taxation environment.) The downside is that it is not perfectly efficient in the sense that the expected return is negative.

General thoughts on the idea? On those two "investment strategies?" On alternatives e.g. financial instruments that resemble a roulette wheel but have a higher expected return?

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Noobvestor
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Re: Shooting for the moon as a young investor

Post by Noobvestor » Tue Oct 03, 2017 9:08 pm

The earlier your invest wisely the more it compounds. The idea that if you're young you can afford to lose money is, in my opinion, entirely backward - you have more time to let compounding earn for you. You don't have to gamble on long shots that almost certainly will fail.

If you want to gamble (as in, literally gamble at casinos), take the small amount of time required to learn how to turn it to your advantage. Counting cards at blackjack isn't hard. I did it and built my first small nest egg that way, turning a 48% disadvantage into a 52% advantage and (yes, just like investing) letting compounding work for me. Finding casinos with favorable odds helps too (not hard off-strip). Don't throw it away.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

Dottie57
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Re: Shooting for the moon as a young investor

Post by Dottie57 » Tue Oct 03, 2017 9:20 pm

20x your investment in 3 years is too good to be true. I would rather invest in lottery tickets.

bigred77
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Re: Shooting for the moon as a young investor

Post by bigred77 » Tue Oct 03, 2017 9:40 pm

I don't subscribe to the OPs line of thinking (I think young professionals with money to invest in their 20s are far better served laying a foundation of sound financial practices and getting a head start on their nest egg using bogleheads principles) but if I did want to shoot for the moon, I'd much rather do so using exchange traded options and futures contracts. At least that's regulated and can have a positive expected value.

Your really just speculating with low cost leverage in that case. Far more transparent than investing in a private company you aren't intimately familiar with (or actively managing) and if you blow yourself up at least it's tax deductible.

eurobogle
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Re: Shooting for the moon as a young investor

Post by eurobogle » Tue Oct 03, 2017 10:53 pm

The idea that if you're young you can afford to lose money is, in my opinion, entirely backward - you have more time to let compounding earn for you.
On reflection I suspect that you are right. On the one hand it's easy to say "you are young, you can always save another $50K later." On the other hand this does not take into account the time value of money. Having a $50K Boglehead portfolio at age 25 is worth more than having the same portfolio at age 30 because of the extra time in the market during your lifetime.

Is there a good illustration of this principle somewhere? i.e. to help young people understand the opportunity cost of using their portfolio for speculation "because I am young and most of my earnings are ahead of me."

itstoomuch
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Re: Shooting for the moon as a young investor

Post by itstoomuch » Tue Oct 03, 2017 11:35 pm

Possibly :annoyed
Theory says that younger people can take more risk, even to the point of 💯% equity..
Rule of 72, says that you only need to double one or possibly twice early on, over whatever base standard you are using:moneybag
Always remember, YMMV🐉, Be careful when you part take in the fugu 🐡.
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b.lock
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Re: Shooting for the moon as a young investor

Post by b.lock » Tue Oct 03, 2017 11:42 pm

A leveraged ETF such as UPRO might fit the bill. It has way bigger swings than the S&P, but also way bigger returns, and you can't lose more than you invest.

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TD2626
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Re: Shooting for the moon as a young investor

Post by TD2626 » Tue Oct 03, 2017 11:53 pm

Gambling is unacceptable. It is in no way "efficient" and can in no way be considered an "investment". One is taking on an enormous risk in exchange for a negative expected return.

Speculation, as well, is not acceptable. Non-systematic risks (the risks involved in concentrated portfolios of small numbers of stocks) are not compensated by the market because they can be diversified away through the use of broad-market index funds.

Conventional wisdom suggests that a younger investor may consider a portfolio with a relatively high equity allocation (80-95%). For example, a target date may be reasonable. However, such an investor would need to be comfortable with the large risk that they are taking by investing so heavily in stocks.

Stocks are risky enough without trying to take on even more risk. Younger investors do not have the benefit of having lived through crashes and thus have a hard time knowing how they'd react. A younger investor who "wastes" several years that they would otherwise have spent doing wise, responsible investment then has several fewer total years for their investments to compound. These years are lost and can't be gotten back.

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TD2626
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Re: Shooting for the moon as a young investor

Post by TD2626 » Wed Oct 04, 2017 12:07 am

b.lock wrote:
Tue Oct 03, 2017 11:42 pm
A leveraged ETF such as UPRO might fit the bill. It has way bigger swings than the S&P, but also way bigger returns, and you can't lose more than you invest.
Avoid this speculative product - these are specialized vehicles for short-term traders only.

The Bogleheads Wiki (https://www.bogleheads.org/wiki/Inverse ... raged_ETFs) says, right at the top of the page,
"Inverse and leveraged ETFs are not suitable for Boglehead-style (buy and hold) investing. In fact, they are not suitable for investing at all..."
This fund would not be expected to outperform over the long run; see this graph in the wiki: https://www.bogleheads.org/wiki/Inverse ... _amount.22


Again, one should invest responsibly and for the long term with buy-and-hold, low-cost, broadly diversified mutual funds - things like Vanguard's Total Stock or Total International Stock funds.

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raven15
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Re: Shooting for the moon as a young investor

Post by raven15 » Wed Oct 04, 2017 12:19 am

I think this could be acceptable, but it would need to have a large positive expected average return. For example, lotteries or gambling have a negative expected return. Bernstein suggests possibly having 60% small cap value stocks, 20% foreign emerging markets stocks, 20% small cap foreign developed market stocks, provided you are certain you can hold on.
It's Time. Adding Interest.

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TD2626
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Re: Shooting for the moon as a young investor

Post by TD2626 » Wed Oct 04, 2017 12:47 am

eurobogle wrote:
Tue Oct 03, 2017 10:53 pm
The idea that if you're young you can afford to lose money is, in my opinion, entirely backward - you have more time to let compounding earn for you.
On reflection I suspect that you are right. On the one hand it's easy to say "you are young, you can always save another $50K later." On the other hand this does not take into account the time value of money. Having a $50K Boglehead portfolio at age 25 is worth more than having the same portfolio at age 30 because of the extra time in the market during your lifetime.

Is there a good illustration of this principle somewhere? i.e. to help young people understand the opportunity cost of using their portfolio for speculation "because I am young and most of my earnings are ahead of me."
If one wants information on the importance of getting an early start on responsible, long-term investing (as opposed to inappropriate, excessively risky speculations that are likely to result in a loss), consider the relevant article from the wiki: https://www.bogleheads.org/wiki/Importa ... ving_early

The Bogleheads Investment Philosophy page (which should be required reading) also has a good graph, here:
https://www.bogleheads.org/wiki/Boglehe ... _and_often

b.lock
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Re: Shooting for the moon as a young investor

Post by b.lock » Wed Oct 04, 2017 1:39 am

TD2626 wrote:
Wed Oct 04, 2017 12:07 am
b.lock wrote:
Tue Oct 03, 2017 11:42 pm
A leveraged ETF such as UPRO might fit the bill. It has way bigger swings than the S&P, but also way bigger returns, and you can't lose more than you invest.
Avoid this speculative product - these are specialized vehicles for short-term traders only.

The Bogleheads Wiki (https://www.bogleheads.org/wiki/Inverse ... raged_ETFs) says, right at the top of the page,
"Inverse and leveraged ETFs are not suitable for Boglehead-style (buy and hold) investing. In fact, they are not suitable for investing at all..."
This fund would not be expected to outperform over the long run; see this graph in the wiki: https://www.bogleheads.org/wiki/Inverse ... _amount.22


Again, one should invest responsibly and for the long term with buy-and-hold, low-cost, broadly diversified mutual funds - things like Vanguard's Total Stock or Total International Stock funds.
Sure, but the OP asked about risky high upside investments that can't lose more than you invest. I know the wiki, and even the SEC, says leveraged ETFs are not suitable for long term investing, but UPRO has increased 1550% compared to the S&P's 176% over the last 10 years.

Valuethinker
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Re: Shooting for the moon as a young investor

Post by Valuethinker » Wed Oct 04, 2017 2:46 am

eurobogle wrote:
Tue Oct 03, 2017 8:50 pm
Thought experiment:

Suppose that you are a young person who has decided to make a single large bet on a risky proposition with a potential quick ~20x return (like this poster). If it goes well then your return may be life-altering e.g. freedom to choose from more personally exciting career trajectories. If it goes poorly then, well, you had your chance and now it is time to click on "Getting Started" and become a good Boglehead.

Question is: what "investments" should such a person consider? Goal is something that returns quickly, has large upside, and has bounded downside (e.g. lose everything invested but not more than that.)

One possibility would be a private investment opportunity like in the thread referenced above. The upside sounds good: ~20x return in three years. There are major downsides though: it is impossible to accurately assess the risk/return ratio, can still take longer than expected to liquidate, can require time and attention, can escalate with follow-on financing requests, can degenerate into legal battles between investors and management, can damage relationships, etc.
If it is career related, yes.
An alternative would be to place one bet in a casino. Pick one or two numbers on the roulette wheel, place your bet, have your outcome within minutes. This seems attractive in that it is instantaneous, the probability distribution of outcomes is transparent, and it is reasonably efficient (assuming a gambler-friendly regulatory and taxation environment.) The downside is that it is not perfectly efficient in the sense that the expected return is negative.
A friend was a director of a spread betting company. In Europe, you can lose hundreds of thousands of pounds this way, all quite legally. They did not have any clients (and their clients were mostly high net worths, professionals working in finance, law etc.) who consistently made money against them, "the House".

So I'd take this as a warning. Casinos are worse, although they make the majority of their profits on the Fixed Odds Betting Terminals (FOTD).

In other words you might as well take your money, put it on the table, cover it in lighter fluid, and light a match.

BTW we used to say that about "investing" on the highly speculative Vancouver, British Columbia, stock exchange. Mining, tech, biotech.

General thoughts on the idea? On those two "investment strategies?" On alternatives e.g. financial instruments that resemble a roulette wheel but have a higher expected return?
Larry Swedroe has a number of posts and commentary elsewhere in the internet about left skew investing. Reinsurance funds. Peer-to-peer lending. There's definitely money to be made there.

You want to right skew invest and it's a losing proposition (as you know) and you can read all you want about Small Cap Growth stocks, Venture Capital etc.

You are basically proposing trading off labour income against investment returns. Slow and steady and the power of compound interest, of Time, is what makes you successful in investing. Buffett for example. Not Long Term Capital Management-- you want to work for a hedge fund or an investment bank, not invest in one i.e. be in a high paid profession, and invest in index funds. Look at how many wealthy doctors there are.*

I am amazed you didn't mention cyber currencies, because that is this Year's high risk bet.

* the other lucrative long term investment is residential property, because you can leverage your investment-- Other Peoples' Money. And you are not usually subject to margin calls. But it's a business, not an "investment" purely. Most of us are happy having one leveraged housing investment that takes a lot of time and stress-- our home.

snarlyjack
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Re: Shooting for the moon as a young investor

Post by snarlyjack » Wed Oct 04, 2017 6:38 am

I' am a young investor (age 23).

I also have a B.S. Degree in Finance from the U of M.
I've done extensive studying & reading here at Bogleheads & other
web sites. Imho, it's all about compounding at a yearly age.

I own 3 funds:
1). LifeStrategy fund (which has tsm, international, & bonds) (11,000 securities).
2). High Dividend Yield Index fund, 406 big blue cap stocks.
3). Dividend Appreciation Index fund , 186 medium high quality stocks.
All of these are index funds, very well diversified. Long term buy & hold.
Along with cd's and no debt.

I would suggest pretty conservative index funds (low ER). Set your
foundation as strongly as possible. The stronger the foundation the better.
Then allow "TIME" to compound the money. Also #1 be frugal, be very frugal.
Diversify out your holdings.

Nedsaid has a saying: "A fool & his money are good for business". I think
that statement is very true. Good luck to you...

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djpeteski
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Re: Shooting for the moon as a young investor

Post by djpeteski » Wed Oct 04, 2017 8:49 am

The problem is that, when you are young, you don't have any money. Most 20 year olds would have a tough time coming up with $1,000. But lets say they could, they could afford to invest it for three years (so they have an additional emergency fund), and will earn 20x. Those are very generous assumptions.

You will make now have 20K instead of 1K.

One alternative is to work a bit harder, perhaps deliver pizza on the weekends or something equally meaningless. If you invest $500/month in a 60/40 allocation you will end up with 22K after three years. Which do you think is a better bet?

Another alternative is to maximize your income. This can be done through education or apprenticeship or whatever. This could easily lead to more than 20,000 additional income year after year. It is a far better investment that either of the two.

When you are young you should focus on maximizing your income, do what you can to increase it.

Jack FFR1846
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Re: Shooting for the moon as a young investor

Post by Jack FFR1846 » Wed Oct 04, 2017 9:02 am

If you'd like to become a millionaire all of a sudden, you could follow my method.

Invest money randomly in 401k, pay off all debts and mortgage, live below my means, do some side hustle, buy some savings bonds, take advantage of no-cost opportunities when they come up (like the savings bonds with credit card trick from years ago or the dollar coin trick from more recently), and ignore the balance in retirement accounts. Then one day, decide to build an excel spreadsheet to figure out what you've saved because you're over 50 and starting to wonder how good of shape you're in and find that you've got a million and a half dollars! Surprise.
Bogle: Smart Beta is stupid

onthecusp
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Re: Shooting for the moon as a young investor

Post by onthecusp » Wed Oct 04, 2017 9:06 am

Trouble with financial moon shots is that if they are successful you try another bigger one. Which ever one goes bad you are back in the same place, at the start, on the ground, at sea level.

Much better to climb a series of financial hills, then low mountains. When one goes bad you roll back into the previous (higher valley), pick yourself up and start climbing again.

NotWhoYouThink
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Re: Shooting for the moon as a young investor

Post by NotWhoYouThink » Wed Oct 04, 2017 9:10 am

Wow, a bunch of old curmudgeons are out today. I'm old enough to be a curmudgeon, but don't think everybody needs to be one.

If you bet at a casino, the casino is trying to make you lose your money. You might win some, but the odds are against you by design.

If you invest in a risky start-up, at least the other investors and management are trying to make it work. Maybe their idea is stupid or crazy, or maybe just crazy enough to work. I don't invest in start-ups, but those who do accept that out of 10 investments they may get 1 or 2 winners, and that is with a lot of vetting of the business plan and management up front. So if you have looked at 10 or 20 plans, and one or two sound to you like they might have a chance, and they have principals with some experience in the school of hard knocks, then investing might not be a horrible idea. You might lose everything, so be prepared for that. You might be in on something big. At least you'll have a story.

Then in 30 years or so when you have more experience and more money, you can either retire and play golf, or you can use some of your much larger (but still discretionary) wealth to research and invest in another 10 high risk ventures, and hope to get a big win that time. But in the interim, stick to long term employment, proactive career management, and passive indexing methods of investing. That will get you from here to there.

dbr
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Re: Shooting for the moon as a young investor

Post by dbr » Wed Oct 04, 2017 10:31 am

I think it is reasonable to invest money and better yet time and energy in a prospective big success, but if one adds the thought of instant success then I think the prospects are always going to be so poor that you could just as well burn your money and would be better off with lottery tickets.

Start ups, business ventures, etc. are legitimate enterprises but require due diligence and not "shoot the moon."

Billionaire
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Re: Shooting for the moon as a young investor

Post by Billionaire » Wed Oct 04, 2017 10:56 am

Desperate times call for desperate measures.

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