Why everyone should have a YOLO account

I love playing guitar. I also happen to love browsing guitar shops and testing the latest gear. Most of my visits are quite innocent and amount to classic window shopping. I’m quite good at resisting temptations when it comes to buying actual guitars. Guitar accessories can be a lot harder to resist because the individual price tag of each time is often reasonably low. This is not necessarily always true for all accessories and even buying multiple reasonably well-priced accessories add up quickly.

Once in a while, I succumb to impulse buying. It’s not as bad as buying a brand new guitar when I already have a few sitting in my living room. Often I will just end up purchasing some expensive effect pedals. The tiny size of the box is often misleading. If I buy a Strymon pedal, that’s almost £300 gone from my bank account. The quality is incredible and I like to think that it justifies the price. Did I really need to spend that on a pedal? Probably not.

 

Deep down, we will all have that impulse to buy something that we don’t need or, at best, might need in the (very far) future. I’m not saying that treating yourself is necessarily wrong. If you have diligently saved for that purchase and factored it into your budget, then be my guest. I’m more referring to the situation where you see something, purchase that something and end up with an unscheduled £300 hole in your budget.

As long as you are not compromising your saving rate (i.e. the percentage of your income that you must set aside every month), then impulse buying is not the end of the world. It is not great (you could have saved and therefore invested more) but the situation can be remedied in the long run.

 

Be mindful of Impulse Investing

If impulse buying can be fixed and remains – for most people but not all – quite innocent, “Impulse Investing” is an entirely different matter. I define “Impulse Investing” as splashing a large sum of cash for investment purposes. At least, that is the stated aim. In reality, those so-called investments are only investments in name. They are extremely risky and speculative. Worse, they could set you back years from your saving or retirement plans. Some people might make money with Impulse Investments but the vast majority of people don’t have the discipline or the temper to handle their volatility and riskiness.

The example of crypto-currencies

Crypto is by far the most recognizable form of Impulse Investing. This is the narrative: you first heard that a couple of geeks made millions and you are intrigued. Then one of your friends in consulting or investment banking mentions the buzzwords “blockchain”, “fintech” and “crypto” in the same sentence. He must be onto something. Slowly the press picks up the story and talks about a new category “investment” products. Game-changer. Then your work colleagues and friends start buying small quantities. Everybody does it. Even people who have no background in finance – like your guitar tutor – are buying. Why not you, right? All of sudden, people are “investing” in bitcoin and other cryptocurrencies. You don’t want to miss the boat and you throw £1,000, £5,000 or even £10,000 in it. Suddenly, you are “investing” in cryptocurrencies. Unless you understood what blockchain meant five years ago, I define this as Impulse Investing.

I’m not saying that you should not buy cryptocurrencies. I am however telling you that this is an untested asset class, it is highly speculative, the market is probably somewhat partially manipulated and for those reasons, it should only represent a fraction of your portfolio. Throwing £10,000 is ok when your portfolio’s value is over £1,000,000 but it isn’t when you only have £20,000 in savings and you are not even maxing out your pension contributions.

Yes, some people will make money. But if you are succumbing to your impulse, rushing to follow the crowds, you have probably already missed the (risky) opportunity to be seized.

Other forms of Impulse Investing

Two other examples, which I have experienced first-hand, come to mind:

 

• Crowdfunding platforms: some investment propositions are worth exploring. The rest is often garbage with improbable valuations. You attend a pitch with some investors. You talk to the founders and they are super excited. They get you excited. Everybody else seems to be a VC hotshot in the room. You grab a drink and people are talking about the second pitch, which was about company X. You don’t fully understand everything that they do but don’t want to miss out so you “invest” immediately when you get home. Unless you have strong experience in angel investing, that’s just Impulse Investing. You have no expertise, no connections and no ability to influence the company you invested in. Strangely, it still better than bitcoins because at least you can claim SEIS/EIS tax relief.

 

• Speculative and unbalanced stock portfolio: you have a significant portfolio, mostly invested in equities and, to a lesser extent, bonds. Your risk profile is already considered to be aggressive by normal standards. Quarterly earnings for this company are coming up and you want to enter a position (i.e. make a bet). You haven’t really read about the industry but saw the company’s name in a few recent headlines. You’re unsure but you have a gut feeling that you want to follow. To maximize your profits, the day before the earnings announcement, you decide to buy options expiring relatively soon. You choose options over stock for better leverage. Even if you are right about the company, most of your returns hinge on a dramatic movement of the stock price. If it only goes up slightly, volatility and theta will probably cause you to suffer a loss even if you right. To a lesser extent, a similar reasoning applies to 3x leveraged ETFs.

 

Three important steps to survive Impulse Investing

The first step is to recognize that we can all fall for “impulse investing” similar to “impulse buying.” “Impulse investing” takes different forms depending on your net worth but common signs often include: rushing to make an investment with little to no due diligence (i.e. relying on word-to-mouth) in an area where you have limited experience.

The second step is to resist the impulse. That’s easier said than done. If you are reading this, then you are in the category of people who are disciplined and working hard towards financial freedom. Your odds are good and, in any event, much higher than the rest of the population. Yet, there are times when even you might fail. My view is that you can be very disciplined and continue to be so for many years. But then, life challenges us and we are more vulnerable. That’s when you might succumb – and even if that’s the only time – it could take months or more to repair the damage. Everybody has a breaking point.

The third step is to ensure that you have a coping mechanism should you fail to resist Impulse Investing. Endlessly attempting to resist Impulse Investing will prove exhausting in the long run. Instead, the idea is to let go of some of the pressure – like releasing steam from a pressure cooker – in a controlled environment. The obvious benefit of a controlled environment is that you are setting the parameters of the said environment: pain threshold, maximum loss, risk levels to name a few. I would rather see the carnage unfold in the controlled environment rather than in my retirement account. Sure, no carnage at all is better. But unless you are a saint, you will probably do something incredibly risky at some point. The why is beyond the scope of this post. We are interested in the how and outcome of that risky decision.

 

The YOLO account is my controlled environment

When it comes to investing, I feel that the media and the Internet tend to over-report extreme gains and extreme losses. In other words, when the S&P 500 or the FTSE drop 0.4%, no one really cares. To some extent, this makes sense: nobody made much and nobody lost much. It is business as usual.

But when Dr. Michael Burry returns 489.33% to his investors, producers release the movie “The Big Short.” When a teenager opens a fund with his gains from crypto-trading, the Financial Times may interview him. Like you, I read those stories and I sometimes wonder: if this guy can pull this off, maybe I can too.

And maybe you could. However, it often requires a set of unique circumstances – including luck – that could set you back years from your financial freedom goals in the event of failure. Hence, the importance of setting up a controlled environment to mitigate any losses and manage the “Fear Of Missing Out” (FOMO) on some speculative investments.

 

In my case, my weakness tends to be highly speculative bets on the stock market. I find index investing incredibly boring. Yes, I know that timing the market is generally a bad idea and that investing in an ETF tracking the S&P500 with low management fees will probably make me a lot more money in the long run. After all, Warren Buffet said so. But the gains are always limited and it feels a bit tedious when you are someone like me with limited patience.

To mitigate any issues, I set up a specific account with Interactive Brokers. The account has a limited amount and it is certainly smaller than you think (under £10,000). That is essentially an amount I am ready to entire lose. By this, I mean a complete and irremediable loss.

I am in control of that account. Sometimes, I don’t even log in for a month or two. At other times, I am a lot more active with multiple trades over just a few consecutive days. My trades tend to be extremely risky as they involve event-driven investments in short-term options for highly volatile stocks. In other words, if I get it wrong, my options expire worthless and the money is gone. It is very different to shares where you can (often) wait indefinitely in the hope that you will make up your losses.

The Rules of the YOLO account – or how to ensure that your controlled environment functions as intended

While there is no real discipline in how I invest or rather “bet” that money, there are strict rules in operating the account:

1. Never top-up the account unless I have doubled my net worth: this rule is meant to prevent people from transferring money to the YOLO account once they have run out of funds. The YOLO account – the controlled environment – has to be insulated from the real world, which includes your retirement savings. We are not in a casino and you don’t get to withdraw more cash from the ATM after losing everything at the roulette table. I have one exception to this rule: if you have doubled your net worth, then you are allowed to top up at least the original amount that funded your YOLO account. If you did well enough to double your net worth – an impressive feat – then it’s probably ok to give your YOLO account another shot.

 

2. Never count the value of your YOLO account in your net worth: think of the YOLO account has an off-balance sheet account. It is essentially a black box. You are not allowed to rely on it because the money could be lost in one single investment. The purpose of that account is not to fund your retirement plan or pay for your stamp duty. You need a regular saving account for those goals.

 

3. Know your pain threshold: you might have told yourself that this is a YOLO account and therefore you may lose it all. It is one thing to say so but experiencing it is another story. Until early August, I was up 70% this year. I lost it all in the span of two weeks because of a combination of bad decisions, bad luck, and unforeseen circumstances. I knew it was risky but when you think that you are getting it right, the return to reality can be brutal. Truly, only put an amount of money that will make no difference whatsoever to your lifestyle if your investments backfire.

 

An insulated portfolio is easy to set up and works well for highly speculative Impulse Investing. If your thing is real estate in high-risk countries such as Turkey right now, then building a controlled environment will take a different form. One golden rule could be not to never borrow against your main residence. Personal guarantees are also a no-go. Borrowing in the local currency is a must.

 

Recognizing impulse investing is tricky because it is not easily spotted when you get a couple of bets right. It usually takes one massive disaster to determine the shapes of Impulse Investing. In any event, setting up a controlled environment will ensure that your financial freedom and financial goals are not in jeopardy when things blow up.