Investing can be an emotional process. Placing your hard-earned money somewhere in the hopes that it will come back to you with significant growth can be stressful. It can also be highly thrilling when an investment pays off. Here is a little case study of a doctor on the verge of making an investment decision.
Dr. Tindell has $10,000 that she is looking to invest. Should she:
- Invest it all on a hot new stock she heard about at a medical conference.
- Invest it all in her cousin Larry’s new start up.
- Invest it all in a specific sector of the stock market.
Which of these answers could make a handsome profit for Dr. Tindell? Answer: All of them. Which of these answers could have Dr. Tindell lose all her money? Answer: All of them.
The real problem with the options given in the scenario above is the word “all.” Even the most steady-handed physician can be tempted by a homerun investment. According to the Financial Free Dictionary, a homerun investment is “an investment that results in an especially large capital gain in a very short period of time;” a windfall.
It’s the investment scenario we all dream about. Dr. Tindall put $10,000 into that hot new stock and in 3 months she cashed out to the tune of $3 million. Wouldn’t that be nice? The problem is that the odds don’t favor this type of outcome, and no one has the ability to predict with 100% certainty when the next homerun investment will occur.
The real issue, as mentioned above, is the word “all.” Whenever you invest with a homerun outcome as the goal, you open yourself up to risk. The old adage “putting all of your eggs in one basket” comes to mind. As explained by Bankrate.com, if you spread your investing out among different types of investment vehicles, you will lower your risk and still have the opportunity to accrue gains. This approach to investing, known as diversification, is the cornerstone of many sound investment plans. As you explore your options as an investor, you won’t regret building a portfolio guided by diversification. Save the homeruns for the playoffs.
