There are a lot of “can’t miss” investment opportunities out there. The financial press is filled with to-the-moon headlines about this stock or that. And even if you’ve weaned yourself from such “news,” there’s always the family gathering at Thanksgiving where Uncle Bob has his recommendations for the next “10 bagger.”
It can be enticing to hear about a company doing interesting — and very possibly, profitable — work. Wouldn’t you want to get in on the ground floor as an investor?
For all such opportunities, there’s the “fun money” account, a portion of your portfolio for exploring new ideas. Should you have such an account?
There are different opinions on this matter.
With some regularity, The Big Picture blogger Barry Ritholtz mentions having a fun money account.
Jack Bogle, the late founder of Vanguard, seemed to suggest, with caveats, that having some money to experiment with isn’t such a bad idea.
“Divide your money into your long-term investment account and your funny money account for short-term speculation," he suggested. "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.”
Taking the other side
Among those who oppose the idea of a fun money account is Ritholtz colleague Tony Isola. In an article titled, "How to Make a Million Dollars Day Trading," he answers that headline in the first sentence: “Start with two million.”
In the same article, Isola says a client once said he was thinking about pulling $10,000 out of his portfolio as “fun money” for daily speculating. Isola’s response? “Why not take this money and go to Las Vegas…? You would have more fun, maybe get comped a room, drinks, dinners, and entertainment. Your odds of success are at least the same, and I think you could at least enjoy yourself while losing money.”
I’ve heard Paul Merriman say that within an investment portfolio, there’s no such thing as fun money. “It’s all serious money.”
JL Collins, author of The Simple Path to Wealth, agrees. Quoted in Christine Benz’s book How to Retire, Collins said, “I hear people say, ‘I have fun picking individual stocks. Can I just put a little money aside and play with it?’ Well, of course, it’s your money. You can do whatever you want with it, but it makes my blood run a little cold, because I don’t expect my money to entertain me. All I want my money to do is work for me, to pay me more money. I’ll find other ways to entertain myself. The more things you expect your money to do, the less effective it will be at making money for you.”
What are your thoughts about this?
Is a limited fun money account a healthy outlet for “scratching a speculative itch” or perhaps a good way to learn about a particular corner of the market or a new investment product?
Or, is it all “serious money”? And how does our responsibility to be good stewards of God’s resources factor into the conversation?
