Despite all the skepticism around the newest it-crypto, Dogecoin (CRYPTO:DOGE) has made at least one millionaire so far. His name is Glauber Contessoto, and after investing over $180,000 in the cryptocurrency back in February, he saw his Robinhood balance climb to over $1 million by mid-April, earning a nearly 700% return.
Contessoto took some huge investing risks, and they paid off for him. But if you're hoping to pull in similar returns by following his strategy, you might want to rethink that. Here's why.
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He invested all of his savings
Contessoto didn't have disposable income to invest in Dogecoin, according to an interview with CNBC, so he invested all of his savings into the cryptocurrency instead. It paid off for him, but if Dogecoin's price had gone down instead of up, he could've lost everything. Not only would that have set him back in terms of retirement and his other financial goals, it could have also left him in a real bind if an emergency expense had come up.
That's why you should only invest money you don't plan to spend within the next five to seven years. And you should always have an emergency fund before you begin investing. Make sure it contains at least three months of living expenses to help you cover emergency costs or a job loss. Once you have this safety net in place, you won't have to worry about a bad investment threatening your financial security.
He sold all the other stocks he owned
Contessoto also chose to sell the other stocks he owned, including shares of Tesla and Uber, to get more money to invest in Dogecoin. It seems like a smart choice now, but Contessoto could come to regret that decision if Dogecoin's price begins to fall.
The problem with investing all of your money in one thing is that you need that investment to do well or you lose everything. But no investor can predict the future. That's why it's safer to spread your money around between 10 to 15 companies in various sectors at a minimum. When one company or cryptocurrency is doing poorly, you'll have other investments that can pick up the slack.
Index funds are a great way to build a solid base of investments with a single purchase. They're bundles of stocks that track an index, like the S&P 500, and they're designed to match the performance of the index at a reasonable cost.
Fractional shares are another option for those who want to branch out into investing in individual stocks but don't have enough money to purchase full shares of big companies. Not all brokers allow this, but a growing number of them do, including Robinhood, the app Contessoto used to make his million dollars.
He invested on margin
The riskiest thing Contessoto did was investing on margin. This means borrowing money from his broker -- in this case, Robinhood -- to purchase Dogecoin.
For those of you who don't know how investing on margin works, you get what is essentially a loan from your broker and you use that money, along with your own cash, to invest in something. If all goes well and the share price rises, you can sell and pay back the borrowed amount, plus whatever interest your broker charges you, and then you pocket the rest.
But if your stock or cryptocurrency drops in price, you have to find another way to pay back what you owe. Your broker may issue a margin call and then you either have to deposit more money into your account or sell some of your other investments to pay your debt. If you don't pay your broker back, it can even liquidate your positions without your consent.
If Dogecoin's price had plummeted, Contessoto could not only have lost all of his savings, but taken on new debt as well. That's why investing on margin is usually a bad idea. There's a lot of risk involved and when you factor in the interest you pay to borrow the money in the first place, you may not make a huge profit even if your investments generate decent returns.
Stop trying to become an instant millionaire
The world is always going to have people like Contessoto who catch a lucky break by betting it all on an investment they found on social media. But there are a lot more who make the same bet and come away empty-handed, possibly ending up worse than where they started.
Most wealthy investors don't get to where they are by making risky moves like those described above. They make sure they're well diversified, have financial safety nets in place, and do their research to know they're investing in quality companies. That's how I approach investing, and if you're serious about growing your wealth, that's what you should do too.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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