How much money do you need before you invest and what does it have to do with a $100 million coin flip?
How much money do you need before investing?
People often ask “How much money do I need to start investing?”. And you get answers such as:
Only invest what you can afford to lose
Only when you have X emergency savings
Only when you have paid off your debts
Only when you have a minimum of $x so that the commission fees are not too much
While there are valid answers along the lines of the above, there’s also another angle which I wanted to get into. But before I get into that idea, I wanted to share a story that came to mind when I considered this question:
Billionaire Kerry Packer was gambling in Las Vegas when a Texas cattleman approached wanting some bigger action. Packer turned him down and the Texan grew annoyed boasting “Do you know I’m worth $US100 million?”. Kerry sized him up and said: “If you want, I’ll flip you for it.” Humbled, the Texan retreated.
Packer was a billionaire and while losing $100 million would be nothing to sneeze at, he could take the hit. The Texan, rich by any standards, could not afford to lose $100 million and so he had to back down.
Why is this story relevant? To invest successfully, you need to be able to put money at risk. You need to be able to hold onto investments in a downturn. Towards the end of 2018, I lost over 4 years of expenditure from peak (see: I lost 4 years), yet this didn’t phase me because:
The value of my investments doesn’t impact my day-to-day life (e.g. I don’t depend on dividends for income)
I was confident that my investments would recover
I was confident that if they didn’t recover, I could keep earning money from my job to make up for the loss
So I would say invest when:
You do not need the money that you invest and can lose it without impacting your life
When you have decent (and stable) income to replace a severe portfolio draw down; and
When you have sufficient other financial reserves such that the loss of your investments would not discomfit you
It is well-recognised that investor psychology is very important to investment returns. Having sufficient financial firepower in reserves and earning capacity is an important way to maintain a level-head when investing.