Risky side of the barbell

Previously I described the mathematics of barbell investing. In practice, the most difficult part is finding volatile assets for the risky side of the barbell. Here are some possibilities:

  1. Crowdfunding startups. The JOBS act was intended to give non-accredited investors the opportunity to invest in startups. There are a number of crowdfunding websites that allow any US citizen to invest in a list of startups. But if you are not an accredited investor there are limits to how much you can invest in private equity. The SEC took years to implement JOBS and the final result has lots of problems. It looks like the real goal of the SEC is to protect investment bankers and accredited investors. Ironic, since they say their mission is to protect the little guy.
  2. Bitcoin and other cryptocurrencies. Bitcoin’s value is based on its promise as a new technology. It is already an effective way to transfer money around the world. It provides decentralized security, based on robust laws of mathematics rather than a central authority. By some measures, its volatility has recently settled down to less than silver. But that’s not saying a lot. Other cryptocurrencies are even more volatile, with larger growth potential but also greater risks. These use technology based on Bitcoin’s but with various tweaks.
  3. Crypto token startups. This is a murky area, because the SEC recently released a ruling that one controversial crypto startup token was a security. Classification as a security means a token falls under a bunch of SEC rules. For example, the token issuer needs to register with the SEC and assure they follow the rules of the JOBS act. They may have to narrow their funding to accredited investors to avoid problems with the SEC. The SEC has issued guidelines on how to determine whether or not a crypto token is classified as a security. If you are a US person, it’s probably best to avoid any tokens that might be securities. (Other countries are starting to follow the USA’s lead on this, too.) Recently, Forbes reported on one company that shut down after a call from the SEC. There are other tokens however that have clear use cases within a platform, and will probably not be classified as securities. (Update: in recent testimony before the Senate, the SEC head said he believes all such tokens are securities.)
  4. Your own business. Even if you just have a vague business idea, it’s probably worth putting a few hundred dollars into it. Try a discovery process like Tim Ferris describes in 4-Hour Work Week. (Or see under chapter 10 here at Tim’s blog.) Set up a simple website, run some Google Adwords ads, and see if people have any interest in your idea.
  5. Small businesses of friends and family. If they have already followed point 4 themselves, and have some traction with a small business, consider helping them expand. Don’t make it a loan, but rather equity (or convertible note). Loans have bounded payoffs (principal plus interest), equity is unbounded.
  6. Other volatile assets? Look at a price chart of silver from 2009 and after. Also palladium. Lots of volatility. Big opportunity for loss or gain. Maybe some emerging markets stocks?

I try to ask what asset has the best chance for a huge payoff, 10x or 100x. New technology and startups (1-5 above) probably have the best shot.

Finally, it would be crazy to invest the entire risky portion (10% of net worth) in any single volatile investment. The safe and risky portions together help me diversify. Then I diversify at another level: separately within the safe portion and risky portions.

I am not a financial advisor. This is not investment advice. If you invest in any of the above assets, you could easily lose your entire investment. Each person’s situation is different. Only you know your own situation.

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