The Riskiest Way To Invest In Stocks
This strategy is entertaining to watch but extremely stressful to implement
The stock market is an indicator of our risk tolerances. People with low risk tolerances tend to buy index funds or reliable dividend stocks that achieve moderate growth and raise the dividend each year. People with higher risk tolerances buy growth stocks.
Each investment carries a risk-reward ratio. Some people can tolerate a high risk in exchange for a high reward.
It’s this thinking that created the breeding grounds for the riskiest way to invest in stocks…the YOLO.
The YOLO takes all of the safe investing strategies and tosses them in the trash. The YOLO was popularized by a sub Reddit known as Wall Street Bets, where 6-figure portfolios are for chumps and it’s millions or nothing.
Literally…
To set up a YOLO, you have to put your entire portfolio into out of the money calls or puts of a single company. You repeat this process until you end up with $1 million or go broke.
This is the most dangerous investing strategy I have come across, and it’s dangerous for a few reasons.
While diversification is overrated (Mark Cuban has said that diversification is for idiots), there is a value in holding onto multiple stocks that you understand rather than focusing on a single stock.
That is, unless you’re Ryan Cohen, the guy with only 2 stocks in his $3 Billion Portfolio. I talked more about him in another article.
If you put all of your money into one stock, that stock will keep you up at night.
If Fastly tumbles, I won’t lose any sleep. If it was 100% of my portfolio, I’d probably lose sleep over a big drop.
But in this example, I own underlying shares of Fastly. If it suffers another big drop, I can hold onto it and wait for the recovery.
With the YOLO strategy, time is not on your side. In fact, time decay eats away at the value of your options contracts.
Each options contract give you the right but not the obligation to buy (call) or sell (put) 100 shares of a stock at a certain strike price. If the stock stays flat, out of the money options will eventually expire worthless.
If the stock or ETF dramatically moves in your favor, the option can gain significant value.
One investor turned $800 into over $115K buying perfectly timed SPY puts.
In case you feel like giving this strategy a try, read the article below first. While $800 to $115K is an incredible success story filled with luck, the other side of the coin is going from $260K to $1,000 in under a month.
The YOLO takes everything you’ve come to learn about investing and flips it on its head. While this is a very entertaining strategy in practice and can take your portfolio to superstardom, it can even more easy wreck havoc on all of your live savings…especially with a combination of greed and a lack of self-control.