Don’t Be an Investor of Constant Sorrow

One of my favorite movies is the Coen brothers’ O Brother, Where Art Thou? In my opinion, it is George Clooney’s and John Goodman’s best work. And the always-great John Turturro doesn’t disappoint.

In the film, the Soggy Bottom Boys sing “I Am a Man of Constant Sorrow,” which is a tale of woe from someone who can’t stay out of trouble.

I was reminded of the song recently when I thought about a friend who can’t stay out of financial trouble. He constantly makes the wrong decisions.

I’m not talking about buying tech stocks when he should have bought healthcare stocks or not allocating enough to bonds.

I mean big mistakes that cost him dearly.

He’s always looking to strike it rich with one big play. I detailed an earlier conversation with him back in 2018 when he asked me for one stock to fix his finances.

Spoiler alert: I didn’t give it to him. Instead, I explained the concepts of growing his money safely (which are detailed in the linked article above).

Surprise, surprise! He didn’t listen.

He once told me that he lost $50,000 in an investment. That was $50,000 more than he could afford to lose. It was some harebrained crypto thing that he didn’t understand, and he lost his entire investment in a matter of months.

I felt terrible for him. My buddy is a good guy. When he has money, he’s generous with it (probably too generous). But his finances fluctuate more than Joe Pesci’s temper in every movie he’s been in.

Time and again, he’s committed two huge mistakes:

1. Focusing on one investment.
2. Investing more than he could afford to lose.

I’ve ridden out bear markets calmly by investing in a variety of sectors and asset classes so something is always working. Even if stocks are way down, I have money in precious metals and fixed income, which takes some of the sting out of it. I also keep cash handy to put to work when stocks have fallen so I can take advantage of lower prices and make outsize returns.

If most or all of your money is invested in a small concentration of investments, you have fewer opportunities to hit a winner. In addition, there’s a very strong chance you’re going to miss a big move in one market because you were unable to deploy cash when prices fell.

You should never invest more than you can afford to lose, especially in a speculative investment. There’s nothing wrong with taking a flier on a riskier trade if you can handle things going south. But you should never be in a position where, if things do go wrong, you’ll be wiped out or suffer a loss that will be tough to come back from.

Wealthy Retirement’s publisher, The Oxford Club, recommends that no more than 4% of your portfolio be invested in any one position. It oftentimes recommends a 25% trailing stop as well, which gives most stocks plenty of room to move and withstand market noise. If you allocated 4% into a position and got stopped out with a 25% loss, your portfolio would be down only 1%.

A 1% decline is not difficult to come back from. A 50% or 100% loss is.

If your portfolio is too concentrated in just a few investments, get busy diversifying. The great thing about being an investor today is that with online brokers, trades are usually free or close to it. It won’t cost you to move money around into different assets.

Lastly, if you haven’t seen O Brother, Where Art Thou? – or even if you have – watch it this week.

That will be the third-best recommendation in this column.