What Elon Musk Got Right by Accident (and Mistakes to Avoid)
Serious entrepreneurs like Elon Musk take risks when pursuing new ventures. While Tesla’s CEO isn’t in the same position as many investors who simply save for their long-term goals, there are lessons investors can take from Musk’s actions.
Taking on too much risk doesn’t make sense for most everyday investors, and you don’t have to dive into speculative investing or start a startup to reach your long-term financial goals. Here’s what to take away from Musk’s risk-taking approach, and four steps to avoid.
What Elon Musk got right about risk
Musk and other visionary entrepreneurs have ambitious goals, like flying into space. As a result, it is important that they accept uncertainty and plan for it. They create timelines, evaluate sub-projects and ensure they have the right resources to move forward until their ideas become reality.
Entrepreneurs and investors can get into trouble by investing their time and money in the wrong businesses, or without proper planning. While you hear about Tesla and Musk’s other projects – such as SpaceX and xAI – succeeding, there are many other speculative businesses and assets that fall within a few years. It’s important to keep that risk in mind when pursuing new investment opportunities.
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Dangerous mistakes investors should avoid
Investors who want to save money for a down payment, send their kids to college or retire work with very different funds and risk tolerances than entrepreneurs like Musk. Here are four moves to avoid, especially as they near retirement.
1. Taking too much risk on a single investment
There’s a reason financial experts say don’t put all your eggs in one basket. Going all in on one publicly traded company, for example, can lead to financial disaster if that stock tanks. Instead, investors should diversify their portfolio across many different asset classes, such as stocks (including those from various sectors, as well as large and small domestic and international companies), bonds and cash.
Buying index funds is a low-cost way to get diversification and competitive returns. Younger investors can take on more risk than their older counterparts who are nearing retirement and have a shorter time horizon.
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2. Exercising options and capabilities
Options and leverage increase the volatility of your portfolio. While you can generate high-paying returns, you run the risk of increasing your losses.
For most investors, it makes sense to avoid these risky assets. However, if you’ve done your research and want to invest in options and energy, limit your exposure. For example, you can limit your exposure to 2-5% of your overall portfolio.
3. Letting headlines dominate your portfolio
Musk uses social media to bring more attention to his ventures, but it’s not fair for long-term investors to stay up-to-date with all the noise. Financial advisors often say that investors should buy stocks that they feel comfortable holding for at least a few years. That way, it’s easier to stick to a planned portfolio entry than to react to every media headline.
You can also write rules that include when to buy and when to sell assets. For example, a 10% rally in the S&P 500 may warrant cutting and reallocating some of your assets. Some investors may feel the need to buy more stocks when the broader market is correcting.
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4. Ignoring potential costs
Big risks like options and margins can bite quickly, but there are also subtle risks like inflation and long-term care that cause some people to outlive their savings.
Focusing too much on growth opportunities can cause investors to skip important things, such as setting up an emergency savings account, having strong insurance policies and creating an effective retirement plan to minimize their taxes and preserve their nest egg.
