Are You a New Investor Who’s Interested in Marijuana Stocks? Read This!

Canopy Growth Corp. (TSX:WEED) is a compelling opportunity, but how should beginners approach such a risky investment?

| More on:

As a newbie, your goal shouldn’t be to get rich quick. It should be to learn how the markets work and learn more about yourself as an investor. How much risk are you really willing to take on? The answer is different for everyone, and there’s no shame if you’re a risk-averse investor. You can still get rich over the years as your wealth snowballs to the next level.

I’m a firm believer that younger investors should be willing to take risks with growth stocks, but that doesn’t mean speculating on whatever’s deemed “sexy” at a given point in time. Chasing such hot stocks is a sure way to get burned, especially if you’re a beginner.

Right now, cannabis stocks are among the “sexiest” of plays, and while the opportunity is real, they offer volatility and risks that are akin to that of bubbly asset classes like cryptocurrencies or tech stocks during the late 1990s. You can get rich pretty quick, but you could also lose your shirt, so it’s important that you’re conditioned for what to expect before you place your bets.

How should a beginner investor grow?

In the first year as a do-it-yourself investor, you should be diversifying your portfolio across a broad range of sectors, which will cut down on your vulnerability to unexpected sector-specific sell-offs. Diversification is the only free lunch in investing, as prize-winning economist Harry Markowitz once said.

Don’t try to whack the market as a beginner; that’ll lead you down the wrong path, and you’ll end up chasing returns. Think long term and be sure you don’t scare yourself out of the markets forever! That means keeping cash on the sidelines should a correction roll around the corner. If you’re fully invested, you’ll feel pain, and you won’t be able to capitalize on sales that come with market sell-offs.

When it comes to risk tolerance, don’t lie to yourself. If you’re risk-averse but wish you could handle more risk, don’t go out and buy speculative securities like Canopy Growth Corp. (TSX:WEED) because you heard it’s the best way for a young person to kick-start their portfolio. With such a volatile and risky stock, you’re pretty much guaranteed to be frightened out of the game, since double-digit percentage movements are the norm in the emerging cannabis industry.

When should you jump into higher-risk plays as a fresh investor?

I’d only recommend investing in such stocks if you’ve got a core investment portfolio that you’re not going to adjust at the expense of your “Mad Money” portfolio, which is where you’ll put cannabis stocks and other speculative securities. In addition, you should have at least managed a “mockfolio” of high-risk stocks in the past, so you’re somewhat familiar with the magnitude of day-to-day or week-to-week movements that you’re signing up for.

Be sure you’re willing to lose every penny of the money you’re putting into such speculative securities, because in the end, that’s ultimately what may end up happening, especially with pot stocks, which could see a majority of their value wiped out because of unforeseen events that may rear their ugly heads in the latter part of 2018. Cannabis legalization may be delayed further or even cancelled altogether should Justin Trudeau not keep his promises before the possible end of his mandate following the 2019 election.

Bottom line

If you’re new to the investing world, and you want to bet on cannabis, just make sure you spread your bets incrementally over time and keep ample cash on the sidelines, so you’re able to average down your cost basis.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. 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, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

More on Stocks for Beginners

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

I’d Invest $5,000 in This 7.5% Monthly Dividend Stock Before the Market Catches On

Need some extra cash coming in? Then this dividend stock is the first place investors will want to look.

Read more »

concept of real estate evaluation
Stocks for Beginners

This Top TSX Stock Could Be the Perfect Buy During a Housing Correction

If you want a stock you can buy and hold for decades as housing ramps up, this is the one…

Read more »

people relax on mountain ledge
Dividend Stocks

How I’d Build a $1,000 Monthly Income Stream With Just These 2 Stocks

If you need some extra income, and don't we all, these are some of the best recommended stocks to buy…

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

The Single Stock I’d Buy to Protect My TFSA During U.S. Trade Tensions

Worried about trade tensions? Then get in on this company that will remain essential. No matter what.

Read more »

The virtual button with the letters AI in a circle hovering above a keyboard, about to be clicked by a cursor.
Tech Stocks

AI Is Taking Off in Canada, so Here’s the 1 Stock to Buy Now

Not all tech stocks are created equal, and this Canadian super star stock is one of them.

Read more »

A shopper makes purchases from an online store.
Dividend Stocks

1 CRA-Friendly Stock Delivering Decades of Tax-Free Income

Not only is this dividend stock essential, it's growing! Making it a top choice on the TSX today.

Read more »

man shops in a drugstore
Dividend Stocks

1 Dividend Stock to Buy if the CRA Tightens TFSA Rules

If there's one thing we all need, it's food. And that's why this dividend stock is a perfect investment.

Read more »

Safety helmets and gloves hang from a rack on a mining site.
Energy Stocks

Suncor Versus Canadian Natural Resources: The Energy Stock I’d Buy on Climbing Oil

These two powerhouse energy stocks deserve attention, so let's get into them.

Read more »