The “Vanilla and Spice” Approach to Making Money

Whether it’s age, marital status, the amount of debt/savings, risk tolerance, or other variables, everyone’s situation is different. That’s why there’s no one-size-fits-all strategy in investing.

Of course, the ultimate goal is to make money, but as the saying goes, many roads lead to Rome.

There are many different investment decisions you can make besides just what stocks to buy or sell. How aggressive do you want to be? How much dividend income do you want to generate per year? Do you want to invest in stocks only? What is your time horizon?

I could go on and on.

The point is that what’s a good idea for John may not be a good idea for Dan, and what makes sense for Beth may make no sense for Jen.

A Good Rule of Thumb

However, despite differences at the individual level, I think there are certain rules of thumb that can apply to everyone. One of my favorite personal rules is to separate my portfolio into a core section and a speculative section. I call it vanilla and spice.

In the core (vanilla) section, I am not looking to be a hero. I invest in a diversified, high-quality, group of blue-chip stocks—usually members of the S&P 500. As a group they may not outperform any market indexes by a wide margin, but they won’t hurt me badly either.

Sure, if some of the stocks turn out to be super winners, I would gladly take it, but they don’t have to be. I just want consistent growth and peace of mind. I don’t want to wake up one day and see that one of these stocks is down 30%.

Looking for Bigger Potential

On the other hand, in the spice section is where I want to invest more aggressively. This means betting on riskier and more speculative stocks in return for potentially huge gains. I may invest in mid- and small-cap stocks, foreign stocks, and sometimes even micro-cap stocks.

I generally devote about 85% of my portfolio to the vanilla section and 15% to the more speculative spice section. But to be clear, that’s just what I feel is right for me.

Depending on one’s situation and risk tolerance, other investors may feel comfortable with a more conservative or aggressive split. Others may prefer to allocate more funds to non-stock investments, such as exchange-traded funds (ETFs), mutual funds, or bonds. The point, though, is to have a plan.

A plan helps you stay disciplined, without making bad investment decisions based on emotions. And of course, as circumstances change over time, you can always adjust the plan.

More on the Spice

As mentioned above, the spice section is where I take chances.

Even among “risky” stocks there are different tiers of risk. I usually reserve a small part of the spice section for the riskiest stocks where I try to swing for the fences. These are typically micro-cap stocks and stocks in relatively new industries with lots of growth potential but also uncertainties.

Examples are blockchain and marijuana.

As government continues to create money out of thin air, the demand for cryptocurrency has risen. While the cryptocurrencies themselves are too volatile for my taste, I think blockchain, the technology behind cryptocurrencies, could have extensive applications in the future.

As for marijuana (and other psychoactive substances such as “magic mushrooms”), momentum for legalization continues. The market could explode exponentially. But the challenge with these markets is that the companies are usually very small and there isn’t much research material available to analyze them.

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