In the latest episode Ramsey PerformanceMichelle of Wisconsin told co-hosts Dave Ramsey and George Kamel about her funny and enviable dilemma.
In 2022, Michelle invested a lot of money ($270,000) in the stock market by investing huge sums ($270,000) and it was a bold move. Fortunately for her, it was during the market correction period. Since then, her investment has quadrupled to $1.1 million [1].
When Michelle entered the market at the right time and picked stocks that had a big return, but this sudden good fortune made her feel upset. She called Ramsey Performance Because she is not sure what to do with such a large stock, she fears her $500,000 unrealized gains could evaporate in the market recession.
Should she keep going, cashing in or finding another strategy to keep her nest egg growing while reducing risks?
Ramsey congratulated Michelle on her success and then quickly turned to risk. Her initial investment was only in 20 companies, and only 4 of the 20 companies generated most of her earnings.
Michelle’s situation usually follows the pattern of stock markets since the pandemic. The 500 largest U.S. companies tracked by standards and poor have grown 70% since 2022, but most of the growth is in “Magnificent 7” composed of NVIDIA, Amazon, Amazon, Alphabet (Google), Meta Platform (Facebook), Microsoft, Apple and Tesla [2].
The seven stocks grew 262.7% as a group, while NVIDIA grew 1,027.7% on its own.
Although the four successful investments representing Michelle seem to continue to grow, Ramsey compared her situation to the gambler, who put all the chips on a roulette and was lucky. Just like in a casino, if you find yourself winning a lot, it may be time to leave the table and leave the building.
“The goals you achieve are unsustainable,” Ramsey said. “For example, people who trade in one day — they are buying and selling during the day — 97% of them lose money in a year. Now, you haven’t traded a day, but you’ve been trading.”
Ramsey explains that even if they performed well in the past and put all their money into some good stocks, you’ll have a huge downturn if these companies falter.
“If I wake up, I’ll scare me, half of my wealth is four stocks,” Ramsey said. “Because as these four companies grow, so is my wealth.”
Diversification, on the other hand, spreads risks in many different investments, creating opportunities for stability and reducing catastrophic losses. Ramsey advised Michelle to sell the stock, pay the taxes owed, and then reinvest the money in a balanced portfolio.
Read More: This year, the chances of a recession reaching the U.S. economy are still 35% – Protect your retirement savings with these 10 basic money moves
Diversification means spreading your money to alternative investments such as stocks, bonds, real estate and gold in different asset classes.
Instead of relying on the performance of a single company, you can reach many different businesses, departments, and asset types. This approach reduces the risk because losses in one area can be offset by the benefits in another area.
Fortunately, we are in the golden age of diversified investment. In the 20th century, diversification in portfolios could mean small stakes in dozens or dozens of stocks, as well as a bunch of paper bonds in your safe. Now you can have almost any type of assets – from stocks to bonds to gold and cryptocurrencies – in exchange-traded funds (ETFs) with low fees and very liquid.
Some investors choose to balance both worlds by putting most of the money into diversified funds while leaving a small portion for a single stock. This strategy allows them to enjoy the stimulation of the company they believe in while ensuring their core investments are secure.
For those who are just starting their investment journey, the safest starting point is to contribute to retirement accounts such as 401(k) or IRA, and tax advantages can help your funds grow faster. In these accounts, low-cost index funds and ETFs are often the best starting point. They provide extensive exposure to the stock market at the lowest cost.
It is also important to stabilize investment rather than try to time the market. Regular contributions, a strategy called “USD Cost Average”, help smooth out market cycles. New investors should focus on long-term growth rather than winning quickly. Before putting money into the market, build an emergency fund to ensure short-term demand doesn’t force you to sell your investment at a bad time.
Michelle’s success as a first-time investor is great and a lesson for others. Her great achievements are extraordinary, but her wisest move is to rebalance her portfolio to ensure she protects her portfolio in a variety of ways.
For first-time investors, her story reminds people to start with stable, diversified investments rather than chasing risky bets. In investment, slow and steady people often win games.
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[1]. Ramsey shows highlights – YouTube. “I made $1.1 million in trading stocks”
[2]. Investopedia. “7 stocks in the grandeur: What you need to know”
This article provides information only and should not be construed as advice. It is without any warranty of any kind.
