One of the fastest ways to lose money is to do extreme things with your investment portfolio. Yet, when people get nervous or over-confident this is exactly what they do. They may decide that a certain asset is best and put 100% of their money into it. Whether it’s 100% stocks, 100% bonds, 100% gold or 100% whatever. Whenever you position your portfolio to make extreme bets on the economy you are taking on a very high level of risk. This risk may not be rewarded with profits but devastating losses.

I was reminded of this today when I heard an investment advisor telling people to put their money in 100% gold, silver and gold mining companies. Last week I heard a different advisor telling people to stay 100% in bonds.  Then there are some saying buy 100% Treasury Inflation Protected Securities (TIPS). Last year I heard advisors recommending 100% stocks. The year before that they were hocking real estate investments.

Here’s my take:

Never put 100% of your money into any single investment.

Ever.

Period.

All investments have risks. I don’t care what it is or how it’s being sold to the buyers. Whether it’s stocks, bonds, gold, TIPS, real estate, cash in your mattress, etc. There is no free lunch and the minute an investor thinks there is a free lunch is when they get into trouble.

Today a lot of scary things are happening in the market. It’s easy to get carried into the wave of doom and gloom and doing some radical things with your money. Well these predictions may come true, but they may not. Or as we discussed before, the predictions may in fact come true but the markets react to them in unpredictable ways that hurt you anyway.

When you’re considering what to do with your money, don’t only think of the profits you’ll reap if your bet pays off. Consider also the effects if your bet turns out wrong. Investors are often hurt by over-confidence. By being honest with yourself and looking at all the ways you can lose it brings more humility to your decisions and could save you money.

So an advisor says go 100% gold? Well what if gold falls by 50%? Can’t happen you say? It happened before in the early 1980s and took 20 years to recover. What about 100% stocks? You think the market has already fallen by 40% and can’t go any lower? Are you sure? The Dow Jones Index dropped 89% in the first three years of the Great Depression. So it can go a lot lower than where it is today. How about 100% Bonds? Bonds are safe, right? Well during the 1970′s the dollar fell by 50% and bond holders got creamed as their value fell and the dollars they paid could buy less and less. Unpredictable things happen all the time in the markets.

It’s easy to get caught up in trying to position your portfolio to profit immensely from an economic disaster. The myriad of “what-if” scenarios is a fun mental exercise that can go on forever. However, many people look to these disaster predictions by thinking “How am I going to make the maximum amount of money if this goes down?” In other words, they are looking to do something extreme and hence risky.

Perhaps the better question is: “How can I break even with my portfolio if this goes down?”

The second question is far better from a risk perspective because you can allocate a smaller percentage of your portfolio to break even or even slightly profit under bad scenarios. Yet, if you are wrong and the bet blows up you aren’t going to be wiped out.

Keep your investments diversified and ignore any expert telling you to put 100% of your money into any single asset. There are many risks in investing and you need to be diversified to protect yourself. If you want to make a bet on any particular future, do it only with money you can afford to lose. Other than that, avoid extremes in your investment strategy at all costs and never, ever, put 100% of your money into any single investment or asset class.

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