My thoughts on risk.

Understanding risk is the first part of mitigating it.

There is no doubt about it, our society is becoming increasingly gamified. Gambling ads are constant at this point, just turn on any sports game and you’ll be force fed 8 different gambling platform commercials.

Very similarly, you have Robinhood, Coinbase, ETrade, and other brokerage platforms encouraging you to join up and begin investing. The only issue is that they are masking trading (or gambling) with the idea that, because it is related to a capital market, you aren’t gambling, you are in fact investing.

Now, you may very well be investing on any of these platforms and the platforms are probably not too happy about that. They want you to trade and they want you to trade often, that is how they make money.

I’ve written about the gamification of capital markets before here.

Since I have already covered that, I wanted to focus more on what risk actually is.

Financial risk is the possibility of losing principal or your initial investment. That’s pretty elementary, but risk is also a key counterparty to the almighty reward. Without putting risk on your money, it will be hard to fight inflation and retain or build your capital over long periods of time.

But there is a limit to the risk we want to put on our money.

In the age of memestocks, options, memecoins, sports betting, and prediction markets it is pretty easy to be enticed to add excessive risk to your capital.

Before I go any further, I know that gambling on anything can be fun, it gives you something to look forward to as well as a potential reward. And this is totally fine! But putting excessive risk on your money is something that needs to be done very carefully and in a way that will not jeopardize your overall financial wellbeing.

When we work with clients who want exposure to alternative assets or a single stock we set thresholds. This might be 5% of their investable net worth. As their asset base grows, maybe we are comfortable with 10% exposure relative to overall investable assets.

It will vary for everyone.

Here is a scenario that I keep thinking about, mainly because I work with younger professionals and because of the FOMO I’ve seen on X with the rise of these memecoins.

Everyone thinks they’re getting into the next hottest memecoin lately.

If you had saved up $5,000, this may serve as your safety net. It’s like a comfortable blanket that you can lean on in the event something goes awry.

If you took this whole $5,000 and it literally 10x-ed, you’d have $50,000. Even less after-taxes.

I don’t know the actual odds of a memecoin going up 10x. But let’s just say it is one in every thousand that actually do this. Based on odds alone, the chances of a 10x are minimal.

Would the potential to lose your entire safety net ever be worth the reward?

I’d say probably not… like probably not ever.

In what ways does this differ from gambling? It might actually be even tougher. When you place a sports bet (outside of in-game cashouts), it is usually binary. You win or you lose.

With something like a memecoin, you not only have to get it right once, but you also must get it right twice. First, you’d have to choose the right one and second, you have to know when to exit.

There is an argument to be made that speculative trading may be more risky than outright gambling.

But people are able to mask the fact that they are gambling more easily when it comes to capital markets. Surely, trading a stock is much more sophisticated than placing a 10-leg parlay… right?

Understanding your financial situation can allow you to take risks in a way that does not threaten the big picture.

Before you chase the next big quantum computing stock, memecoin, 13-leg parlay, or prediction market, make sure you’re not putting more value at risk than your financial standing can support.