Smart Investing: How to Take Risk Without Gambling Your Future

We recently spoke with a young investor who approached us for tax planning advice after managing to build a substantial portfolio themselves over the last couple of years. An impressive achievement. But a quick look at his holdings revealed:

• 80% in four individual stocks
• 20% in an S&P 500 index fund

His logic? “I’m young, I can handle risk.” That confidence is common in strong markets. However, bull markets don’t last forever.

Why Managing Risk Matters

When markets rise for years, it’s easy to feel invincible. But when conditions change, portfolios heavily weighted in individual stocks can drop sharply. Before taking on risk, ask yourself:

• What’s my plan if the market falls 50%?
• How much of my wealth can I truly afford to risk?
• Do I know when to sell if my investment thesis fails?

If these answers aren’t clear, it’s not risk management. It’s speculation.

Remember those “hot stocks” from 2020-2021? They were immensely popular until they crashed:

• Zoom: $560 → $84 (-85%)
• Peloton: $162 → $7 (-95%)
• Snapchat: $83 → $9 (-90%)

None of these three have recovered to new highs. Meanwhile, the S&P 500 is up over 90% from the 2022 bottom.

The Smart Way to Take Risk with Individual Stocks: The 80/20 Rule

80% Core – An Appropriate Diversified Portfolio

• Broad diversification
• Steady long-term growth
• Foundation for wealth building

20% Satellite – Individual Stocks

• Room for higher-growth opportunities
• Manageable downside if they underperform

Example: With a portfolio

• 80% in a diversified portfolio or index funds
• 20% in selected individual stocks

If the stocks underperform, the majority of your wealth keeps compounding. If they succeed, you capture strong upside without risking everything.

Key Takeaway

Taking risk is part of investing. But doing it with a plan is what separates investors from gamblers. If you’re unsure how to structure your portfolio or manage risk in changing markets, speak with the experts at Oreana Private Wealth. Our advisers can help you design a resilient investment plan built to last through every market cycle. Get in touch with Oreana Private Wealth today to start building your strategy for long-term success.