Should you invest $1K, $10K and $100K in the same way?
You could argue that the strategy of investing should be the same no matter how much money you are investing - all the principles of diversification, asset allocation and risk management still apply. However, I could also argue differently, that how you invest your money strongly depends on how much money it is you are investing. Rather, how much that money means to you. I’m going to argue for the latter.
The first question you need to ask yourself is “how prepared am I to lose this money?” You might be earning millions a year, and are fully prepared to lose 10K. Or maybe you’ve been struggling with getting a decent pay and 10K represents all the money you’ve managed to save in the last 5 years. The rule of thumb is the more prepared you are to lose the money you are investing, the more risk you should be willing to take with that money.
So in an ideal world, if $1K is a lot of money for you, you should go wild with diversification. Spread it across an ETF, blue chip stocks, big tech stocks, gold and maybe a little bit of crypto. But you’re not going to do that. It also doesn’t make sense. There are transaction fees, the admin burden and monitoring of it all. And for what? a 4% return on $1K? Nah. In reality, with $1K, you’re probably better off diversifying less. You might go 50% into an index ETF and 50% YOLO strategy (more on this at another time). But if you suddenly had $100K to invest, you would be waaaay less likely to be YOLO-ing away $50K. Now you’re much more likely to be following a proper asset allocation strategy and diversifying. Why? Because there is much more at stake - your hard work that got you the $100K in the first place and also because a 4% return on $100K is 100 times higher than a 4% return on $1K. Maybe you’re close to affording a down payment on a house. It has a significantly higher purchasing power.
The right thing to do is to increase your risk management as the amount of money you are investing increases. Understand what you can afford to lose when you are investing, and invest on that basis.