Read This if You're a Young Investor
The advice I keep seeing on Blossom for young investors is that when you're young you can afford to take more risk, and in general I agree with that. Where it goes sideways is in how people put it into practice. Increasing risk usually turns into increasing concentration, and lately that means a few AI names or bitcoin/crypto.
What concentration does is widen the range of what could happen to you, without paying you anything extra for it. You might hit it big and you might lose 80 or 90 percent of it, and both of those are very real possibilities.
You could take your whole paycheque to a roulette table and put it on red. You have definitely increased your risk. But run that a million times and your expected return is negative, because the wheel has a green zero on it. Run a diversified basket of stocks a million times and your expected return is positive. Both are risky. Only one of them has something paying you to take the risk.
Hendrik Bessembinder looked at 25,967 US stocks from 1926 to 2016 and found that only 42.6% of them beat one-month treasury bills over their lifetime, with just 4.3% of stocks accounting for all the net wealth created above T-bills. The median stock lost money. So when you concentrate, you're betting you're holding some of that 4.3%.
The usual argument is that a 20 year old can afford to lose it, because there's plenty of time to recover. Personally I'd argue the opposite. If you're 20 and you lose $10,000, at 8% over 40 years that's about $217,000 you don't have at 60. That's the price tag on the bet, not ten grand.
And most people are placing this bet inside a TFSA, which makes it worse. If you put $10,000 in and it falls to $1,000, you only get $1,000 of room back when you withdraw it. The other $9,000 of contribution room is gone for good. You can't claim the loss against anything either, since capital losses inside a TFSA can't be used to offset capital gains.
I understand the appeal of treating it as bonus money and hoping you picked right. But if you buy something diversified and keep contributing, you put yourself in a good position without ever needing the home run.
