Invest Within Your Means
Live within your means.
You've heard this saying, or some variation of it, a million times in your life. It's the foundation of financial responsibility that has been taught, and largely ignored, throughout history.
Modern day writers differentiate between “living rich” and “being rich”:
Writers like Benjamin Franklin were less colloquial:
Remember that Time is Money. He that can earn Ten Shillings a Day by his Labour, and goes abroad, or sits idle one half of that Day, tho’ he spends but Sixpence during his Diversion or Idleness, ought not to reckon That the only Expence; he has really spent or rather thrown away Five Shillings besides.
But whether you read it on social media or in an essay from a founding father, the message is the same: Don't buy what you can't afford.
I want to put some spin on this philosophy with you today...
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Invest Within Your Means
You've heard to only invest money that you can afford to lose. And this is, of course, a major part of living within your means. But what I mean by “investing within your means” is more specific to risk exposure in a stock portfolio.
All investments and speculations involve an intrinsic level of risk. But investing within your means involves determining exactly how much risk is in your stock portfolio.
An investor with money and assets to fall back on can take more risks than one without. A millionaire with a $250,000 stock portfolio can afford the risk of a few long shots. An investor with fewer assets and a $250,000 portfolio can't afford to take as many risks. And the reason is simple: The millionaire can afford to lose more.
How much risk is in your portfolio? Can you afford it?
If your portfolio is full of long-shot speculations, and you're not Jeff Bezos, you can't afford the risk. For most people, investing within their means requires a portfolio that consists of low-risk equities.
A few weeks ago, we talked about the difference between an investor and a speculator. As Benjamin Graham puts it, investors determine “the market price by established standards of value.” Conversely, speculators “base [their] standards of value upon the market price.”
In other words, investors base market price on value; speculators base value on market price.
Write it down on a piece of paper: Which of your stocks are investments and which are speculations?
How much are you speculating in your portfolio? Can you afford it?
Speculating can be extremely rewarding. But it's also one of the worst possible ways to build wealth over the long term. Invest within your means.
Proper risk exposure is one of the core principles of value investing. And it's one that's turned everyday working guys into early retirees.
If you're interested in learning more about the principles of value investing, check out Charles Mizrahi's Park Avenue Investment Club. Charles has dedicated his entire 35-year career to these principles. He was ranked the No. 1 performing market timer, not only on Wall Street but also in the entire U.S., based on the actual performance of client accounts.
Are you investing within your means?
Contributing Editor, Park Avenue Digest
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bubble and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets.