Martini Investing

Feb 25, 2021 | Lena Rizkallah, JD, CRPC®

I’m a fan of vodka martinis. I like my martinis very dry with a drop of vermouth, not at all dirty, and with three olives (a bartender once told me two olives is bad luck, and in my opinion, one olive is not enough!). A martini is a great way to start a Friday evening right before tucking into a steak or sushi dinner. And if you’re not a beer drinker, a martini pairs very well with classic pub foods like nachos, onion rings and jalapeno poppers (don’t knock it ‘til you try it!).

The problem with a martini is that, if you drink it ‘up’ in a traditional martini glass- which is my preference—you have to enjoy it seated at a table. You can’t drink it standing in a crowded bar. Any passerby can easily jostle your drink with the slightest nudge, someone telling a story could flail their arms into your precious cocktail, an unintended elbow could cause you to tip your glass. The end result of all of this volatility? A stressful happy hour and often a less than full cocktail because of unnecessary spillage.

Investing can often feel like you’re holding a martini in the middle of a crowded bar, especially if you’re seduced by the latest investing trends. Over the past few months, several clients, friends, my 18-year-old nephew, even the guy at the Wendy’s drive thru- have reached out to ask me what I think of Tesla/GameStop/Bitcoin/American Airlines/silver/Dogecoin, etc. With the rise in popularity of online trading platforms like Robinhood, the boredom of long days in quarantine and the recent market volatility, more individuals are getting into the market to trade individual stocks, and this in itself has created some unusual short-term volatility—and has furthered the curiosity and FOMO of everyday investors.

There will always be unusual investing opportunities but the real questions every investor should ask herself are:

– ‘For this particular pot of money, what is my investing goal and timeframe? ‘
– ‘Have I already established a solid financial foundation before investing in speculative or volatile positions?’
– ‘How much market volatility (and potential losses) can I really weather?’

For the long-term investor, it’s important to figure out what each pot of money is intended for and what is the ultimate goal for that investment. Here are six steps to consider:

  1. The beginning of any solid financial foundation is to establish an emergency fund which is funded with 3-6 months’ worth of necessary expense. Think about what your monthly budget is and what part of the budget is spent on non-discretionary items.
  2. Take advantage of any tax-deferred retirement savings available to you. If you are participating in your employer plan like a 401(k) or 403(b), try to save up to any employer match or beyond. If you have the opportunity to save in a Health Savings Account (HSA), take advantage as these accounts provide triple tax benefits and help you save for qualified health care services.
  3. Additional dollars should go towards paying down any high interest debt like credit card, car loans, or high interest loans. If you have a lot of revolving debt, call the lenders
    to negotiate repayment plans, reduce your monthly interest rate or consolidate debt and then do your best to pay it down.
  4. Once you have established an emergency fund, put money away towards retirement and paid down your debt, it’s time to invest. Consider working with a financial advisor who can help you review your goals holistically; determine your risk tolerance and help you make investment decisions towards reaching those goals. If you want to invest on your own using an online discount brokerage company, be aware that you may miss out on important investment guidance and the development of a financial plan that can serve as a financial roadmap.
  5. Maintain a long-term investment mindset and diversify. Consider investing in a mix of equities and fixed income. This may upset investors with FOMO who only chase returns, but in the long run, adding less risk assets to your portfolio may help you achieve the returns you need. Consider that the long-term average investor return is around 2.5%–that’s because investors tend to jump in when the market is already high and pull out during the lows. In a balanced portfolio, the equity exposure helps you achieve the positive returns while the fixed income investments help to buffer your portfolio against market downturns—so investors don’t have to make sudden changes.
  6. Review and rebalance periodically. Investing for the long-term does not mean ‘set it and forget it.’ As time passes, it’s important to review your portfolio and make adjustments. Many advisors recommend strategically selling some of the winning positions to buy more of the losers which may give your portfolio more opportunity to grow. Additionally, certain positions within your portfolio may increase in value disproportionately to other positions which may alter the equity/fixed income ratio so it’s important to adjust your allocation from time to time.
    If you’ve accomplished steps 1-6 above and still want to invest in certain individual stocks or speculative investments, remember that these investments should be funded with money you’re ok with potentially losing–not rent, grocery money or retirement plan contributions—and definitely not martini money.