As I’ve gotten older, my risk tolerance has steadily declined. This is why I’ve only got ~30% of my net worth allocated to the public markets. When you accumulate enough wealth, you no longer want to have as much exposure to assets that are intangible, risky, and hard to control. There’s just too much at stake.

For example, let’s say you’ve got a respectable $200,000 invested in the market. If your portfolio loses 30% of its value, you can still make up the $60,000 loss through contributions from your various income sources. It may take a while, but based on current median income levels, $60,000 is not an insurmountable loss.

If you lose 30% on a $2 million portfolio, making up $600,000 is a grind! If the $2 million was derived mostly from middle class wages you earned over the decades, you’ve pretty much screwed yourself out of ever living off a $2 million portfolio if you planned to retire then. You might be dead long before you ever get back to even.

Back in 1998, the head of the derivatives desk at Goldman made me read a 1,000 page book called, Options As A Strategic Investment by Lawrence McMillan after our first round of interviews. When I came back for my next round of interviews two months later, all they asked was,”What is a butterfly spread?” from the second chapter! I got the answer right, but was annoyed that I had spent so much time on a book I’d never use again. Ever since then, I haven’t spent any time trading options myself. Instead, I just buy the occassional structured note for a fee to keep things simple for downside protection. But for those of you who are super gung-ho about investing, here is a guest post from Dom at GenYFinanceGuy.com about the benefits of selling options.

I have always believed that risk is a function of education. The media may have you convinced that options are very risky, but what if I told you that you could actually take on less risk than buying stock outright? If you take careful steps and don’t speculate, you can increase your probability and reduce your cost basis. Oh, and you won’t be afraid of volatility again, you will actually hope and pray for it.

There are two option strategies that will allow you to buy Stocks and ETF’s below current market prices. The Covered Call and the Short Put are option strategies that allow you to go long at discounted prices every trading day of the year. The discount prices get deeper during corrections when fear drives volatility through the roof, which inflates option premiums.

Before we get into how options can be safer and more advantageous than buying stock outright, let’s get a few definitions out of the way.

We’re all filthy rich now! Yay!

We’ve talked about the risks of investing in private companies. Now let’s talk about investing in IPOs and how the IPO process works.

In another step towards democratizing access to investments, JPMorgan announced it will distribute a small portion of any initial public offerings it leads through the online firm Motif Investing, where I currently freelance part-time.

Taking private companies public was a big part of my job when I worked in the Equities department at a couple major banks for 13 years. Knowledge is wealth and I’m here to share my first-hand experience about the IPO process to help make you a better investor.