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What do you do if a high-risk investment suddenly balloons to become much more than 20% of your total investments? When do you choose to jump off the potential

by marvin 9y ago

What do you do if a high-risk investment suddenly balloons to become much more than 20% of your total investments? When do you choose to jump off the potential 10000x return and rebalance, if this has ever happened to you? (And the next time you make a 20% bet, is it 20% of the new total, or 20% of your traditional portfolio?)

icedchai 9y ago
I've had this happen with Bitcoin. It is a tough decision to make. I have decided that I don't want any single high risk investment to consist of more than 10% of my networth, so I sell some to compensate. Is that the right number? I don't know...
- marvin 9y ago
  If it was me, I would sell enough to have received a gain of 2-3x my cost basis even if the rest becomes worthless, and then just leave the rest alone unless there is a compelling reason to sell. If you aren't open to _receiving_ the truly outrageous returns that black swan-type events might cause, there is no sense in making bets for black swans. You do need to be a good sleeper to do this though. The other criterion I'd use is that if one of my risky bets has returned enough money that I could likely retire from it (i.e. >25x annual expenses), I would sell enough to be capable of doing that. That's such a monumental quality of living change that it's not worth it to keep the same level of risk.
  - Procrastes 9y ago
    This. That's pretty much exactly what I did, although it was more like 800x because bitcoin. It gave me quite a bit of peace of mind to know that even if I was wrong, I was wrong in a very reasonable way and not completely out of the game.
Strom 9y ago
What I do is I do the percentage split on money I direct towards investments. So I have X dollars to invest in a month, 25% will go to high-risk, 65% medium, 10% low-risk. Any profits coming from a certain risk section will be reinvested into that same section. If some section really balloons out of control I can perform some rebalancing, but in practice I haven't had to worry about that yet.

by marvin 9y ago

icedchai 9y ago

I've had this happen with Bitcoin. It is a tough decision to make. I have decided that I don't want any single high risk investment to consist of more than 10% of my networth, so I sell some to compensate. Is that the right number? I don't know...

marvin 9y ago
If it was me, I would sell enough to have received a gain of 2-3x my cost basis even if the rest becomes worthless, and then just leave the rest alone unless there is a compelling reason to sell. If you aren't open to _receiving_ the truly outrageous returns that black swan-type events might cause, there is no sense in making bets for black swans. You do need to be a good sleeper to do this though. The other criterion I'd use is that if one of my risky bets has returned enough money that I could likely retire from it (i.e. >25x annual expenses), I would sell enough to be capable of doing that. That's such a monumental quality of living change that it's not worth it to keep the same level of risk.
- Procrastes 9y ago
  This. That's pretty much exactly what I did, although it was more like 800x because bitcoin. It gave me quite a bit of peace of mind to know that even if I was wrong, I was wrong in a very reasonable way and not completely out of the game.

Strom 9y ago

What I do is I do the percentage split on money I direct towards investments. So I have X dollars to invest in a month, 25% will go to high-risk, 65% medium, 10% low-risk. Any profits coming from a certain risk section will be reinvested into that same section. If some section really balloons out of control I can perform some rebalancing, but in practice I haven't had to worry about that yet.