A Low(er)-Risk Strategy for Investing in Cannabis and Cryptocurrencies

Investing in the latest trends can be risky. Stocks such as Canopy Growth Corp. (TSX:WEED)(NYSE:CGC) rise and fall quickly. Reduce risk by investing only dividends from relatively safe stocks such as BCE Inc. (TSX:BCE)(NYSE:BCE).

Investing in the latest trends can be risky. Price movements in speculative sectors such as cryptocurrencies, blockchain, and cannabis can make you sick to your stomach if you have any money invested in the sector. Or the volatility may simply make you want to stay away and avoid the volatility altogether, potentially missing out on massive gains. While I definitely would not want to invest large amounts of money into either of these sectors, it may be fun to take a stab at them.

The issue is that many people do not know how much they want to invest and may end up putting too much money into the sector. While this is great when the stocks keep shooting up, it can be heart-wrenching to see your money slipping away when volatility brings them down to earth.

Having a plan in place can keep you from panicking if things do not go your way. I suggest making use of a mental bias that we all have to help us manage how much we invest in risky sectors. The mental bias, known as Mental Accounting, was first described by the researchers Amos Tversky and Daniel Kahneman. Essentially, it means that we put money into different mental accounts depending on where the money comes from, even though in reality all our money is in one big pot.

In order to limit the amount of money that you invest in risky sectors, first invest your money in solid, dividend-paying stocks such as Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) or BCE (TSX:BCE)(NYSE:BCE). These stocks pay solid, growing dividends of 4.3% and 5.7%, respectively, producing income that you can then save and invest. This becomes the seed money for your mental account for taking big risks.

Try using a one-third rule for putting this money into the market. Put one-third of the dividend proceeds into cannabis stocks, one-third into cryptocurrency-related investments, and one-third into cash. These accounts will seem like playing with “the house’s money” and will not be as devastating if lost.

The cannabis-marked money can be put into ETFs, such as the Horizons Marijuana Life Science Index (TSX:HMMJ), or into individual stocks, such as Canopy Growth (TSX:WEED)(NYSE:CGC). Either will work, although you will have more leverage on individual companies and therefore more risk. Also, many brokers allow you to buy ETFs commission-free, so check with your broker to see if this is possible. ETFs may be useful for smaller accounts, as you can buy as little as one ETF unit immediately after receiving your dividend.

The one-third portion of your portfolio dedicated to cryptocurrencies could be put into either an ETF such as the Horizons Blockchain Technology & Hardware Index ETF (TSX:BKCH) or an individual company such as Hive Blockchain Technologies Ltd. (TSX:HIVE). However, in this case, I would suggest putting the money straight into a cryptocurrency. Why not go for the gold with the money in this mental account?

Finally, put the remaining third of your dividend money into savings, preferably keeping it in your trading account using an ETF, such as Purpose High-Interest Savings ETF (TSX:PSA), iShares Premium Money Market ETF Comm (TSX:CMR), or Horizon Active Floating Rate Bond ETF Comm (TSX:HFR). These cash accounts will give you a small yield, but, more importantly, will give you some comfort that at least a portion of your money is safe. This will give you a degree of comfort, while the rest of your dividend money goes up and down like a yo-yo.

But stick to your plan and only invest the dividends. Do put more money into these speculative investments than what was outlined. If you do, you may not find a limit and may end up putting too much in, leading to a potentially massive loss. Using the concept of mental accounting will help you to limit losses if things take a turn for the worse.

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 Kris Knutson owns shares of BANK OF NOVA SCOTIA, Enbridge, ENBRIDGE INC, Purpose High-Interest Savings ETF, iShares Premium Money Market ETF Comm, Horizon Active Floating Rate Bond ETF Comm, and HIVE Blockchain Technologies Ltd. Enbridge is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

ways to boost income
Dividend Stocks

3 Dividend Stocks to Double Up on Right Now

The market is full of great dividend stocks for income seekers. Here’s a look at three stellar picks to consider…

Read more »

profit rises over time
Dividend Stocks

2024 Roller Coaster: Canadian Stocks That Delivered Major Surprises

Is it time to buy on weakness? For stocks that have climbed significantly, investors should manage expectations and focus on…

Read more »

engineer at wind farm
Dividend Stocks

Top Canadian Utility Stocks for Stability in 2025

As Canadian investors face considerable market uncertainty heading into 2025, these 2 defensive stocks are worth a gander.

Read more »

Nurse uses stethoscope to listen to a girl's heartbeat
Dividend Stocks

This 7.4% Dividend Stock Pays Cash Every Single Month

Northwest Healthcare Properties REIT offers dividend investors a defensive investment that should prove to be resilient and reliable.

Read more »

A close up color image of a small green plant sprouting out of a pile of Canadian dollar coins "loonies."
Dividend Stocks

Billionaires Are Selling Lululemon Stock and Picking Up This TSX Stock

Here's why some are parting ways with their athleisure darlings and choosing this dividend darling instead.

Read more »

Meeting handshake
Dividend Stocks

Mergers and Acquisitions Are Heating Up for 2025, and These 3 Stocks Could Be Targets

Alimentation Couche-Tard Inc (TSX:ATD) has tried to buy out 7/11. Will it prevail in 2025?

Read more »

Man holds Canadian dollars in differing amounts
Dividend Stocks

2 No-Brainer Stocks for Less Than $1,000

These two fundamentally strong TSX stocks offer promising growth potential and are likely to deliver above-average returns.

Read more »

Hourglass and stock price chart
Dividend Stocks

The Smartest Dividend Stocks to Buy With $3,000 Right Now

One attractive buying opportunity for new passive income investors looking to put some money to work before a Santa Claus…

Read more »