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Recreational marijuana is legal in New York and in the years ahead, the industry is likely to generate millions of dollars.
That’s prompting interest from some people in investing in pot stocks, wealth management experts said. For now, local advisers are suggesting a cautious approach.
As an industry, marijuana is young. There are few publicly traded companies in the field and those that exist don’t have extensive track records.
In addition, marijuana regulations and tax rules vary by state. Not to mention, the drug is still illegal as far as federal law is concerned.
That all adds up to risk and uncertainty.
“The first thing we say is proceed with caution,” said Mark Nardella, senior vice president at East Syracuse-based Pinnacle Investments. “Typically, these types of investments are extremely speculative. You can have significant gains, but you can also have significant loss, including entire losses.”
At some point, some company in the space is going to take off, Nardella said. Eventually, it’s likely the field will have blue chip, reliable investments.
If you can get in early on one of those, you’re in for big returns.
It’s hard to say at this point who those winners will be, Nardella said.
The best option for someone interested in the industry right now is probably a mutual fund or exchange traded fund (ETF) focused on the marijuana business, Nardella said.
Such funds hold shares of multiple companies. Investors who buy them get exposure to several firms instead of just one at a time. The idea is to reduce risk, while also giving the chance for gains.
It’s important to do your homework on any marijuana investments you’re considering, Nardella said. Research the people involved with the companies you’re interested in and examine their track records.
Find out where the firms are getting their funding from. If they’re borrowing heavily, that adds risk.
Investors interested in marijuana could also look to buy shares in a company that is only partially dedicated to pot, instead of fully, said Meghan Shue, head of investment strategies for Wilmington Trust Investment Advisors, a part of M&T Bank.
For example, you might buy shares in a drink company that is experimenting with marijuana-based beverages, but also has other products.
“So you’re not going to see that tremendous growth, but you’re going to have a little bit more diversification,” Shue said. “You’re going to have a little bit of margin of safety.”
There is strong growth potential in the sector, Shue said. Some research suggests the industry could grow 20% to 30% per year for the next several years.
If you do decide to invest in marijuana, it’s best to keep it a small portion of a broader stock portfolio, said Ethan Gilbert, an adviser with Rockbridge Investment Management in Syracuse.
Anyone looking at the performance of marijuana stocks in 2021 and 2020 would probably be impressed, Gilbert said. They’ve done well.
But go back to 2019 and the sector was down 30% when the rest of the market was up by that much.
“It’s risky,” Gilbert said. “They’re young, they’re small and they’re volatile.”