I have a philosophy that every choice we make has some power over our lives. If you choose to step into a busy street and get hit by a car you use your power self-destructively. If you decide to start eating healthy and stay fit you use your power constructively. Most of the time we use our power blindly because we don't really think about it.
When it comes to making investments we have two kinds of choices: passive and aggressive. A passive choice is like investing in a bond fund or an index fund. An aggressive choice is like buying shares in a company you think is about to take off or maybe going short on a company that you think is about to hit the skids.
Wherever you put your money into the stock market you are using your power of choice to change your life. But the power is gone once you make the choice. Even if you make a million dollars you cannot take that choice back.
My friends think this is a crazy idea because if your investment grows you can cash it in and use that money to make even more choices. So isn't that increasing your power? I say no because what if you could have made two million dollars? The power is used only once, when you make that decision.
This is nothing to be frightened of. We all make choices every day that influence the rest of our lives. We are constantly changing course and looking for new ways to improve our situations. So I think it is safe to say that we only have so much power of choice in our lives and we can never take it back once we make a choice. We can reverse course later on but we have to use more power of choice to do that.
When it comes to making investments it is not so easy to reverse course. My boss once lost fifty thousand dollars in a day because he bought a stock right before bad news came out about the company. By the time he heard the news it was too late for him to do anything. He took a paper loss on the investment and held on to the stock for a few months. Eventually he sold out but he never recovered his investment.
Whatever you do in the stock market you have no control over what comes next. The $10,000 you drop on an index fund can lose half its value in a week or overnight. But here is the takeaway: if you put your money in an index fund and it drops through the floor you have more reason to believe that fund will come back in the future than if you put your money into an individual stock.
It's okay to take risks in the stock market but you should never risk everything on a single risky investment. I believe in dividing my money between resilient funds like the index funds and between my high-risk bets. That is how I spend the power of my choices.
