When financial advisors provide advice to clients, they often distinguish between investing and speculating. Investment advisor Jim Cramer pointed out that for young people managing their finances, the most important thing is to look for speculative opportunities.
Investing typically refers to long-term, stable investment in products that diversify risks in the market, allowing compound interest to work over decades. Ramit Sethi, author of “I Will Teach You To Be Rich,” stated in a July 2023 interview on CNBC’s “Make It” program that “real investing is actually quite boring, like watching paint dry.”
On the other hand, speculation is completely different: it is thrilling. Speculators purchase assets that could potentially bring high returns while also carrying significant risks of losses. Jim Cramer, host of CNBC’s “Mad Money” show and author of “How to Make Money in Any Market,” mentioned that taking on some risks in moderation could lead to substantial profits in wealth accumulation.
“I believe in speculation. I don’t think speculation is a bad thing,” Cramer said. “I hope you can speculate wisely.”
Cramer’s investment portfolio strategy combines diversified investments with holding individual stocks, as detailed in his book. He suggests allocating about 50% of your portfolio to passive mutual funds or exchange-traded funds (ETFs) that track the U.S. stock market index, such as the S&P 500.
The remaining half of the funds can be diversified into several stocks, with most being high-quality growth stocks, he said. Additionally, he recommends choosing at least one or two speculative stocks if you are just starting to invest. He noted that for young investors, such speculation could significantly enhance the opportunity to accumulate long-term wealth.
“Young people should be asking, ‘Where do I put my money?’ The most important thing is to look for speculative opportunities,” he said.
These stocks may not necessarily have the same fundamentals as other stocks in your portfolio, with possibly less impressive earnings or high valuations; however, they are stocks with the potential to change the world that you believe in.
“Perhaps you believe in quantum computing, perhaps you are bullish on nuclear energy, or you think there is something truly special in cryptocurrency,” Cramer illustrated.
Cramer’s strategy of going all-in with a small portion of funds can indeed lead to substantial returns. Just ask those who invested early in Tesla or Nvidia stocks and whether they wished to choose a more conservative diversified investment approach initially?
However, Cramer emphasizes that prudent speculation means you must fully understand the risks involved and the potential impact of potential losses on the overall investment portfolio. Speculative funds may be completely wiped out, but if that happens, being young is your advantage; you still have time to recover from that relatively small loss.
“You are still young, you have your whole life to make that money back,” he stated.
Some may consider this approach too reckless, but Cramer believes that giving oneself a chance for a life-changing return is worth the risk. “It’s not reckless, it’s cautious,” he expressed.
Cramer, a prominent figure in CNBC’s media, writer, and former hedge fund manager, is known for his unique and straightforward stock market analysis. He hosts the daily show “Mad Money,” providing stock recommendations and viewpoints, and operates the CNBC Investment Club.