Don't Aim for the 10-Bagger

Mutual funds are a different can of worms, because they offer a basket of stocks instead of just one. But you still have to worry about betting too much on a volatile and high-growth sector that's loaded with would-be 10-baggers. The chart below shows just how much technology funds have suffered.

Holding the Bag Tech and telecom funds, once home to the dreams of 10-baggers, have retreated drastically the past three years.

Source: Morningstar

You hit the jackpot with one but you still lose loads of money. The math does work if you're only investing in, say, five companies and one of them turns out to be a major winner. But take a step back: You'd only be betting on five stocks. The odds of picking one success out of five are slim. You don't have a lot of room to make money unless you're very lucky. And investing isn't about luck.

Plus, stocks tend to be consistently overpriced in areas like tech and biotech because the payoffs can be enormous. These speculative stocks are already expensive when you buy them, which limits the potential upside. Millennium Pharmaceuticals (MLNM), for example, has posted hundreds of millions of dollars in losses in recent years but at its peak had market cap of about $20 billion. Say the company was a success and got as big as Amgen (AMGN), which is worth $67 billion today: You would have made a little more three times your money. And that's not nearly enough to cover the dozens of losers you would have owned in that industry.

If you want to bet on a new and risky part of the market, think the way you would if you were heading to Vegas for the weekend: Keep your bets small.

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