Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 448

Should you have a 'fun' portfolio?

Many of us set aside an amount of play money to swing for the fences every now and then. This can help scratch the speculation itch without putting too much at risk. It’s something I’ve done since I started investing. Sometimes I’ve used it as a quick cure for the fear of missing out, or FOMO. Other times I’ve spent this money to force myself to learn more about corners of the market that I don’t know well. Sometimes, I’ve plunked it down because I thought I was on to something the market was missing.

Like many of you, I’ve had a mixture of successes and failures along the way, and learned a lot in the process. Here, I’ll explore the idea of carving out a pile of “funny money,” address the potential pluses and minuses of the approach, and sprinkle in some personal anecdotes.

A funny idea

The idea of cordoning off a pile of cash for an impulsive bet isn’t directly supported by any academic research. As far as I can tell, one of its most prominent proponents was late Vanguard founder Jack Bogle. He outlined the case for this approach in a 2014 interview with MarketWatch:

“Divide your money into your long-term investment account and your funny money account for short-term speculation. Guess on funds, guess on markets, guess on stocks if you want to, because that gives you an opportunity to act on your speculative impulses.

“But they will hurt you a lot, so I recommend you have a funny money account of no more than 5% of your portfolio. I also recommend that after five years, check it out. Has it done better than the long-term investment or worse? I’d be astonished if at least 95% of those funny money accounts don’t do worse.”

Bogle, indexing’s greatest champion, was also a student of human nature. If he advocated having a funny money portfolio (a term he also coined, at least in this specific context), it was in the hope that investors would avoid tinkering with the remaining 95% of their money.

From the very beginning, we humans have been inclined to succumb to temptation. We know what’s best for us, but it can be difficult and – let’s face it – boring to stay on the straight and narrow. We know that good sleep, regular exercise, and a balanced diet are critical to good health. But we’re so often tempted by the latest faddish health shortcuts. When it comes to investing, we know that broad diversification, low costs, and a minimal amount of activity are vital for the health of our portfolios. When we turn on CNBC and see splashy headlines and flashy graphics and we can’t help but want to do something.

A pile of funny money can be investors’ pressure relief valve in much the same way that a “cheat day” (a day that someone can eat whatever they’d like) can help people stick to a nutrition programme.

What’s the plan?

Perhaps the single most important decision investors face when laying their funny money plans is how much of their investable assets they will allocate to these exploits. Bogle suggested “no more than 5%,” but that’s a generic prescription for a diagnosis that will be deeply personal. For some investors, the right number may be zero. Others might be willing to wager more than 5%. Ultimately, the best answer is “it depends”.

My favorite way to think of an appropriate amount is to back into a sum of money that you could see go down to zero without losing sleep. Would it put you off course? For some, that might be a round number, say $1,000 or $10,000. Others might size it in different terms, say as a year’s worth of dividend income from their stock portfolio. In my case, less than 1% of my investable assets are allocated to funny money positions: a combination of some individual stocks, a closed-end fund, and a wee bit of bitcoin (0.00820984 to be precise).

Many investors prefer to set up a dedicated account for their funny money ventures. I can see the value of separating your play money from your serious money, though I don’t do it myself. Keeping them apart can potentially help prevent spillover (“Maybe I’ll just put a little more into this up-and-coming metaverse-based yacht manufacturer.”) and keeps mental accounting clean (“This is my play account.”).

What’s the upside?

I think the biggest potential benefit of putting aside play money is that it can prevent you from taking big risks with the rest of your portfolio. A small bucket of money with a very specific purpose can get you a ticket to ride on the latest bandwagon, let you put some skin in the game when digging into a new opportunity, or simply try to make a bet that the market is mispricing something. It can be genuinely fun and educational, though it may not be financially rewarding. Meanwhile, the rest of your portfolio remains left untouched, dull as ever, and quietly compounding.

What’s the downside?

What’s the worst that could happen if you play with a portion of your portfolio? Assume you carve out 5% of your assets for riskier investments. What if they all got wiped out? Losing 5% of your portfolio outright would put a dent in your financial plan (and your ego), but it wouldn’t be ruinous. What if, instead of going to zero, your play pot simply did worse than the remainder of your portfolio? In that scenario, I’d hope that it would reinforce your conviction in the principles that guided your approach to managing your serious money. That’s been my experience. On the whole, my more, speculative bets have been a mixed bag at best. My feeble attempts to outsmart the market or outright speculate have reinforced my conviction in broadly diversified low-cost funds and the benefits of benign neglect when it comes to long-term investment success.

But what if your bets succeed? What if that 5% of your portfolio performs so well that it becomes 10%, 15%, or more? What then? I don’t know anyone who would be disappointed by this outcome, but this sort of upside could have potential downsides, too. This level of investment success can breed overconfidence and is difficult to replicate, especially as it’s often a factor of luck and not skill. The best investors know these things and keep these victories from turning into hubris.

As my colleague Amy Arnott found in her 2021 “Mind the Gap” Report, many individual stocks (and every crypto asset under the sun) have much higher levels of volatility than diversified funds. Even some of the best-performing stocks over the long-term experience periods of performance that would test the mettle of even the most stoic investors. Being able to hold on through some episodes of unfunny performance is required if investors hope to have any fun with their funny money.

Let’s be serious

A play portfolio isn’t for everyone. A lot of investors wouldn’t put a penny toward an endeavour like this. And that’s great! For those people who think a bit of dabbling might do them a world of good, it’s an option worth considering. But remember to keep an honest tally of your wins and losses, and don’t let the former go to your head.

 

Ben Johnson, CFA is Director of Global Exchange Traded Fund research for Morningstar. This article is general information and does not consider the circumstances of any investor. Minor changes have been made for an Australian audience.

Access data and research on over 40,000 securities through Morningstar Investor, as well as a portfolio manager integrated with Australia’s leading portfolio tracking service, Sharesight. Sign up to a free, four week trial below:


Try Morningstar Investor for free


 

RELATED ARTICLES

Decoding an ETF's DNA

Why do investors earn less than the funds they invest in?

banner

Most viewed in recent weeks

A tonic for turbulent times: my nine tips for investing

Investing is often portrayed as unapproachably complex. Can it be distilled into nine tips? An economist with 35 years of experience through numerous market cycles and events has given it a shot.

Rival standard for savings and incomes in retirement

A new standard argues the majority of Australians will never achieve the ASFA 'comfortable' level of retirement savings and it amounts to 'fearmongering' by vested interests. If comfortable is aspirational, so be it.

Dalio v Marks is common sense v uncommon sense

Billionaire fund manager standoff: Ray Dalio thinks investing is common sense and markets are simple, while Howard Marks says complex and convoluted 'second-level' thinking is needed for superior returns.

Welcome to Firstlinks Edition 467

Fund manager reports for last financial year are drifting into client mailboxes, and many of the results are disappointing. With some funds giving back their 2021 gains, why did they not reduce their exposure to hot stocks when faced with rising inflation and rates?

  • 21 July 2022

Welcome to Firstlinks Edition 466 with weekend update

Heard the word, cakeism? As in, 'having your cake and eating it too'. The Reserve Bank wants to simultaneously fight inflation by taking away spending power, while not driving the economy into a recession. If you want to help, stop buying stuff.

  • 14 July 2022

Welcome to Firstlinks Edition 465 with weekend update

Many thanks for the thousands of revealing comments in our survey on retirement experiences. We discuss the full results. And with the ASX200 down 10%, the US S&P500 off 20% and bond prices tanking, each investor faces the new financial year deciding whether to sit, sell or invest more.

  • 7 July 2022

Latest Updates

Economy

The paradox of investment cycles

Now we're captivated by inflation and higher rates but only a year ago, investors were certain of the supremacy of US companies, the benign nature of inflation and the remoteness of tighter monetary policy.

Shares

Reporting Season will show cost control and pricing power

Companies have been slow to update guidance and we have yet to see the impact of inflation expectations in earnings and outlooks. Companies need to insulate costs from inflation while enjoying an uptick in revenue.

Shares

The early signals for August company earnings

Weaker share prices may have already discounted some bad news, but cost inflation is creating wide divergences inside and across sectors. Early results show some companies are strong enough to resist sector falls.

Property

The compelling 20-year flight of SYD into private hands

In 2002, the share price of the company that became Sydney Airport (SYD) hit 80 cents from the $2 IPO price. After 20 years of astute investment driving revenue increases, it sold to private hands for $8.75 in 2022.

Investment strategies

Ethical investing responding to some short-term challenges

There are significant differences in the sector weightings of an ethical fund versus an index, and while this has caused some short-term headwinds recently, the tailwinds are expected to blow over the long term.

Investment strategies

If you are new to investing, avoid these 10 common mistakes

Many new investors make common mistakes while learning about markets. Losses are inevitable. Newbies should read more and develop a long-term focus while avoiding big mistakes and not aiming to be brilliant.

Investment strategies

RMBS today: rising rate-linked income with capital preservation

Lenders use Residential Mortgage-Backed Securities to finance mortgages and RMBS are available to retail investors through fund structures. They come with many layers of protection beyond movements in house prices. 

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.