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I recently graduated college and got a steady job making decent money as a software engineer/programmer. I make more than enough money to sustain myself and save up money, while still having money left over to invest. Once I am at my company long enough, I will be putting 6% into a 401(k) with the company matching half.

My question is: What would be the best route for investing my money? I have very high risk tolerance and I am looking to grow my investments quickly. I know that diversifying my investments is a good idea in the long term, but for me, if I lose the first $10,000 that I invest, then it's not the end of the world.

Should I pick one high risk stock that I really like, and just invest in it?

Should a pick a couple of high risk stocks to invest in?

Or, should I just follow the conventional advice and put my money into a collection of stocks, bonds, and mutual funds?

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What percentage are you already saving long-term through tax advantaged accounts? How much on top of that do you want to invest, and do you want to invest a lump sum or incrementally over time? –  Nathan L Aug 13 at 21:03
    
I edited my answer to include my 401k details and it will probably be incremental investments. –  Ian Sellar Aug 13 at 21:08
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A side note: "high risk tolerance" and "grow my investments quickly" are to some extent incompatible goals. Having a high risk tolerance means accepting that, although your investment is more likely to grow quickly, it is also more likely to shrink quickly. –  BrenBarn Aug 13 at 22:07
    
Can you share what expenses the 401(k) choices have? –  JoeTaxpayer Aug 14 at 0:24
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Each fund will have its own expense, a percent cost each year. The 401(k) itself may have additional costs. At the very low end, you may see funds near .05%, at the high end, 1.5% or higher. –  JoeTaxpayer Aug 14 at 3:14

10 Answers 10

up vote 6 down vote accepted

You have a high risk tolerance? Then learn about exchange traded options, and futures. Or the variety of markets that governments have decided that people without high income are too stupid to invest in, not even kidding.

It appears that a lot of this discussion about your risk profile and investing has centered around "stocks" and "bonds". The similarities being that they are assets issued by collections of humans (corporations), with risk profiles based on the collective decisions of those humans.

That doesn't even scratch the surface of the different kinds of asset classes to invest in.

Bonds? boring. Bond futures? craziness happening over there :)

Also, there are potentially very favorable tax treatments for other asset classes. For instance, you mentioned your desire to hold an investment for over a year for tax reasons... well EVERY FUTURES TRADE gets that kind of tax treatment (partially), whether you hold it for one day or more, see the 60/40 rule.

A rebuttal being that some of these asset classes should be left to professionals. Stocks are no different in that regards. Either educate yourself or stick with the managed 401k funds.

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Thanks for the good advice. I realize I probably need to do a lot more learning before I can seriously take high risk position and expect to do well. Accepted as best answer, but they were all helpful. –  Ian Sellar Aug 16 at 19:31

If you're sure you want to go the high risk route:

You could consider hot stocks or even bonds for companies/countries with lower credit ratings and higher risk. I think an underrated cost of investing is the tax penalties that you pay when you win if you aren't using a tax advantaged account.

For your speculating account, you might want to open a self-directed IRA so that you can get access to more of the high risk options that you crave without the tax liability if any of those have a big payout. You want your high-growth money to be in a Roth, because it would be a shame to strike it rich while you're young and then have to pay taxes on it when you're older.

If you choose not to make these investments in a tax-advantaged account, try to hold your stocks for a year so you only get taxed at capital gains rates instead of as ordinary income. If you choose to work for a startup, buy your stock options as they vest so that if the company goes public or sells privately, you will have owned those stocks long enough to qualify for capital gains.

If you want my actual advice about what I think you should do:

I would increase your 401k percentage to at least 10% with or without a match, and keep that in low cost index funds while you're young, but moving some of those investments over to bonds as you get closer to retirement and your risk tolerance declines. Assuming you're not in the 25% tax bracket, all of your money should be in a Roth 401k or IRA because you can withdraw it without being taxed when you retire.

The more money you put into those accounts now while you are young, the more time it all has to grow. The real risk of chasing the high-risk returns is that when you bet wrong it will set you back far enough that you will lose the advantage that comes from investing the money while you're young. You're going to have up and down years with your self-selected investments, why not just keep plugging money into the S&P which has its ups and downs, but has always trended up over time?

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I didn't mention powerball tickets. You didn't say how high that risk tolerance is. There's a huge potential payout if you buy a big block of tickets when the jackpot is really high... Just make sure to consult a tax planner on how to claim the reward before you venture in that direction. :) –  Nathan L Aug 13 at 21:41
    
Haha my risk tolerance is not quite that high. With regards to putting my high growth investments into a Roth, wouldn't that restrict me from accessing my money until I reach 65? I would prefer to be able to access and possibly reinvest my money, so I would probably go with the holding of stocks for a year+ route to avoid income taxes. –  Ian Sellar Aug 13 at 21:55
    
You have to wait 5 years after you contribute to not have the growth taxed as income, and you have to wait until 59 1/2 for withdrawals without the 10% penalty, but you can also use it for qualified first-time home purchase expenses. –  Nathan L Aug 13 at 22:02
    
I wouldn't recommend 401(k) until we know the expenses. A high expense can change the advice to "invest anyplace but the 401(k). I'd say that for anything north of 1%. –  JoeTaxpayer Aug 14 at 0:28
    
Yeah, I guess there may still be plan administrators that don't put a low-cost index fund in the mix, but I haven't seen one in years. –  Nathan L Aug 14 at 13:52

If you have been putting savings away for the longer term and have some extra funds which you would like to take some extra risk on - then I say work yourself out a strategy/plan, get yourself educated and go for it.

If it is individual shares you are interested then work out if you prefer to use fundamental analysis, technical analysis or some of both. You can use fundamental analysis to help determine which shares to buy, and then use technical analysis to help determine when to get into and out of a position.

You say you are prepared to lose $10,000 in order to try to get higher returns. I don't know what percentage this $10,000 is of the capital you intend to use in this kind of investments/trading, but lets assume it is 10% - so your total starting capital would be $100,000. The idea now would be to learn about money management, position sizing and risk management. There are plenty of good books on these subjects.

If you set a maximum loss for each position you open of 1% of your capital - i.e $1,000, then you would have to get 10 straight losses in a row to get to your 10% total loss. You do this by setting stop losses on your positions. I'll use an example to explain:

Say you are looking at a stock priced at $20 and you get a signal to buy it at that price. You now need to determine a stop price which if the stock goes down to, you can say well I may have been wrong on this occasion, the stock price has gone against me so I need to get out now (I put automatic stop loss conditional orders with my broker). You may determine the stop price based on previous support levels, using a percentage of your buy price or another indicator or method. I tend to use the percentage of buy price - lets say you use 10% - so your stop price would be at $18 (10% below your buy price of $20). So now you can work out your position size (the number of shares to buy). Your maximum loss on the position is $2 per share or 10% of your position in this stock, but it should also be only 1% of your total capital - being 1% of $100,000 = $1,000. You simply divide $1,000 by $2 to get 500 shares to buy.

You then do this with the rest of your positions - with a $100,000 starting capital using a 1% maximum loss per position and a stop loss of 10% you will end up with a maximum of 10 positions. If you use a larger maximum loss per position your position sizes would increase and you would have less positions to open (I would not go higher than 2% maximum loss per position). If you use a larger stop loss percentage then your position sizes would decrease and you would have more positions to open. The larger the stop loss the longer you will potentially be in a position and the smaller the stop loss generally the less time you will be in a position. Also as your total capital increases so will your 1% of total capital, just as it would decrease if your total capital decreases.

Using this method you can aim for higher risk/ higher return investments and reduce and manage your risk to a desired level.

One other thing to consider, don't let tax determine when you sell an investment. If you are keeping a stock just so you will pay less tax if kept for over 12 months - then you are in real danger of increasing your risk considerably. I would rather pay 50% tax on a 30% return than 25% tax on a 15% return.

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Very detailed thank you. Could you possibly point me to some books about money management, position sizing and risk management? I can't seem to find anything but short articles online. –  Ian Sellar Aug 14 at 2:40
    
@IanSellar - a good book to start with is Trade Your Way to Financial Freedom by Van Tharp. You can also check out his website. –  Victor Aug 14 at 3:05
    
Not to say that the strategies you propose are wrong, but given that the OP has limited knowledge, I don't think that is the right place to start. What you describe is inherently complex as it involves more decisions than simply how to allocate the assets (e.g., when to buy, when to sell, what stop loss level to set). It can be valuable to learn how to make such decisions, but not until you've figured out what you're going to be buying and selling in the first place. –  BrenBarn Aug 14 at 4:34
    
@BrenBarn - that is why my first point was to get educated first. Something anyone should do before contemplating any investments. –  Victor Aug 14 at 4:58

Congratulations on being in this position. Your problem - which I think that you identified - is that you don't know much about investing. My recommendation is that you start with three goals:

  1. Learn more about investing
  2. Understand how the business model around investing houses etc.
  3. Get comfortable with investing

The Motley Fool (www.fool.com) has a lot of good information on their site. Their approach may or may not align with what you want to do; I've subscribed to their newsletters for quite a while and have found them useful. I'm what is known as a value investor; I like to make investments and hold them for a long time. Others have different philosophies.

For the second goal, it's very important to follow the money and ask how people get paid in the investment business. The real money in Wall Street is made not by investment, but by charging money to those who are in the investment business. There are numerous people in line for some of your money in return for service or advice; fees for buying/selling stocks, fees for telling you which stocks to buy/sell, fees for managing your money, etc. You can invest without spending too much on fees if you understand how the system works.

For the third goal, I recommend choosing a few stocks, and creating a virtual portfolio. You can then then get used to watching and tracking your investments.

If you want a place to put your money while you do this, I'd start with an S&P 500 index fund with a low expense ratio, and I'd buy it through a discount broker (I use Scottrade but there are a number of choices).

Hope that helps.

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S&P 500 in general is good advice, but note that putting the money in an index fund in a taxable account can mean you get hit with a tax if you later decide to shift the money elsewhere, since you'll have to sell the shares. –  BrenBarn Aug 14 at 4:36

I'd suggest you start by looking at the mutual fund and/or ETF options available via your bank, and see if they have any low-cost funds that invest in high-risk sectors. You can increase your risk (and potential returns) by allocating your assets to riskier sectors rather than by picking individual stocks, and you'll be less likely to make an avoidable mistake.

It is possible to do as you suggest and pick individual stocks, but by doing so you may be taking on more risk than you suspect, even unnecessary risk. For instance, if you decide to buy stock in Company A, you know you're taking a risk by investing in just one company. However, without a lot of work and financial expertise, you may not be able to assess how much risk you're taking by investing in Company A specifically, as opposed to Company B. Even if you know that investing in individual stocks is risky, it can be very hard to know how risky those particular individual stocks are, compared to other alternatives.

This is doubly true if the investment involves actions more exotic than simply buying and holding an asset like a stock. For instance, you could definitely get plenty of risk by investing in commercial real estate development or complicated options contracts; but a certain amount of work and expertise is required to even understand how to do that, and there is a greater likelihood that you will slip up and make a costly mistake that negates any extra gain, even if the investment itself might have been sound for someone with experience in that area. In other words, you want your risk to really be the risk of the investment, not the "personal" risk that you'll make a mistake in a complicated scheme and lose money because you didn't know what you were doing. (If you do have some expertise in more exotic investments, then maybe you could go this route, but I think most people -- including me -- don't.)

On the other hand, you can find mutual funds or ETFs that invest in large economic sectors that are high-risk, but because the investment is diversified within that sector, you need only compare the risk of the sectors. For instance, emerging markets are usually considered one of the highest-risk sectors. But if you restrict your choice to low-cost emerging-market index funds, they are unlikely to differ drastically in risk (at any rate, far less than individual companies). This eliminates the problem mentioned above: when you choose to invest in Emerging Markets Index Fund A, you don't need to worry as much about whether Emerging Markets Index Fund B might have been less risky; most of the risk is in the choice to invest in the emerging markets sector in the first place, and differences between comparable funds in that sector are small by comparison. You could do the same with other targeted sectors that can produce high returns; for instance, there are mutual funds and ETFs that invest specifically in technology stocks.

So you could begin by exploring the mutual funds and ETFs available via your existing investment bank, or poke around on Morningstar. Fees will still matter no matter what sector you're in, so pay attention to those. But you can probably find a way to take an aggressive risk position without getting bogged down in the details of individual companies. Also, this will be less work than trying something more exotic, so you're less likely to make a costly mistake due to not understanding the complexities of what you're investing in.

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I have no investing experience whatsoever so I will probably be avoiding exotic investments. I have begun to look around on Morningstar and I am finding that I don't understand most of the concepts they are talking about. Are there any good "investing 101" type sites that can help with terminology and concepts? –  Ian Sellar Aug 14 at 2:49
    
@IanSellar: Investopedia has a dictionary of financial terminology that can be useful. You might also want to take a look at info on the Bogleheads wiki. It has more specific advice but also provides intro explanations of many concepts. –  BrenBarn Aug 14 at 4:10

Theoretically there is limited demand for risky investments, so higher-risk asset classes should outperform lower-risk asset classes over sufficiently long time periods. In practice, I believe this is true, but it could be several decades before a risky portfolio starts to outperform a more conservative one.

Stocks are considered more risky than most assets. Small-cap stocks and emerging market stocks are particularly high-risk. I would consider low-fee ETFs in these areas, like VB or VWO. If you want to seek out the absolute riskiest investments, you could pick individual stocks of companies in dire financial situations, as Bank of America was a couple years ago.

Most importantly, if you don't expect to need the money soon, I would maximize your contribution to tax-advantaged accounts since they will grow exponentially faster than taxable accounts. Over 50 years, a 401(k) or IRA will generally grow at least 50% more than a taxable account, maybe more depending on the tax-efficiency of your investments.

Try to contribute the maximum ($17,500 for most people in 2014) if you can. If you can save more than that, I'd suggest contributing a Roth 401k rather than a traditional 401(k) - since Roth contributions are post-tax, the effective contribution limit is higher. Also contribute to a Roth IRA (up to $5,500 in 2014), using a backdoor Roth if necessary.

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An ideal investment for a highly risk tolerant college grad with a background in software and programming, is a software company. That's because it's the kind of investment that you will be able to judge better than most other people, including yours truly.

Hopefully, one day the software company for a highly risk tolerant investor will be your own.(Ask Bill Gates or even Michael Dell, although the latter was more involved in hardware.)

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I am in a very similar situation as you (software engineer, high disposable income).

Maximize your contributions to all tax-advantaged accounts first.

From those accounts you can choose to invest in high risk funds. At your age and date-target funds will invest in riskier investments on your behalf; and they'll do it while avoiding the 30%+/- haircut that you'll be paying in taxes anyhow.

If, after that, you're looking for bigger risk plays then look into a brokerage account that will let you buy and sell options. These are big risk swingers and they are sophisticated, complicated products which are used by many people who likely understand finance far better than you. You can make money with them but you should consider it akin to gambling.

It might be more to your liking to maintain a long position in a stock and then trade options against your long position. Start with trading covered calls, then you could consider buying options (defined limited downside risk).

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Sorry to be boring but you have the luxury of time and do not need high-risk investments. Just put the surplus cash into a diversified blue-chip fund, sit back, and enjoy it supporting you in 50 years time.

Your post makes me think you're implicitly assuming that since you have a very high risk tolerance you ought to be able to earn spectacular returns. Unfortunately the risks involved are extremely difficult to quantify and there's no guarantee they're fairly discounted. Most people would intuitively realise betting on 100-1 horses is a losing proposition but not realise just how bad it is. In reality far fewer than one in a thousand 100-1 shots actually win.

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If only investment was that easy -- if you know that fewer than one in a thousand 100-1 horses come in then there's a killing to be made betting against them (i.e. holding a short position), which is reliable provided you keep the size of each position small enough that you're covering the risk. Of course in a financial market, the big traders would be all over any such opportunity to suck that price disparity out of the market. Presumably it's supported in gambling markets because betting on long shots is fun and so people pay for the privilege. –  Steve Jessop Aug 15 at 8:20
    
@SteveJessop It's not that easy. There's virtually no money wanting to back no-hopers. You'd have to offer extremely high odds and eventually one will come in. The financial equivalent might be selling deep out-of-the-money calls on terrible companies. –  TheMathemagician Aug 15 at 9:26
    
"There's virtually no money wanting to back no-hopers" -- well, not at odds less than 1/10 of what they should be there isn't ;-) I've always assumed that those 100-1 odds on horses are basically there because the bookie has to offer some odds. The occasional punter is willing to throw money away, and bookies are happy to catch it, but they're not in the business of pricing based on fundamentals (especially such fine decisions as the difference between a 100-1 no-hoper and a 1000-1 no-hoper), so with low volume they just price high and wait. –  Steve Jessop Aug 15 at 10:02

You think you have a "high risk tolerance"?

Don't.

Stick with the wisdom everyone else (more experienced than you) is telling you to do. Invest conservatively. Mostly just in your 401k.

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