Humans are curious creatures. We like to regard ourselves as being internally consistent while the reality is far messier. For evidence, look no further than our investments.
Or as the artist formerly known as Dr. Moneyblogs is fond of quoting:
Don't tell me what you think. Tell me what you have in your portfolio.
-Nassim Nicholas Taleb
Many personal finance writers, bloggers and podcasters suggest that one's portfolio contain no more than 10% "fun money," a catch-all intended to accommodate the idiosyncracies of human nature by permitting an otherwise rational portfolio to contain some element of the irrational.
I get it.
You are a passive index fund investor who does not believe in individual stock picking...except for those shares of Tesla you picked up because you really believe Elon Musk is a crazed genius.
You never bothered to read up on the blockchain revolution...but your friend paid his daughter's university tuition with appreciated shares of bitcoin, so you invested a few grand as well, just in case.
An old J.P Morgan saying comes to mind: Nothing so undermines your financial judgement as the sight of your neighbor getting rich.
I'll be the first to admit I observe my own forms of crazy.
I used to wake up at dawn and stand in line every few months to have first crack at the REI Garage Sales that offered used gear at significantly reduced prices.
My wife and I once escaped for a weekend in Vegas based around the fact that Southwest was offering promotional fares from LA for 19.99 each way.
I succumb to irrational temptations more than I'd like to admit; I possess and recognize our shared human frailties.
I just try not to do it in my portfolio - those dollars have specific job descriptions, and they don't get to slack off as long as they're working for me.
Comments 7
Love the quotes. So true.
But wait. What do you consider your BTC investment?
It is a speculation at best, right?
Author
WD,
I own no bitcoin, but I try to differentiate folks who speculate blindly vs. thoughtful folks I look up to (Gasem) who have done significant research in how adding a fixed amount as an uncorrelated asset to one’s portfolio might have a role to play in optimizing the efficient frontier. I am not qualified to distinguish the former from the latter.
Since you’ve enjoyed them, I’ll end with a final quote: WCI is fond of saying there are no called strikes in investing. At this stage in my investing life, I’m fine to sit this one out.
Thanks for stopping by,
CD
Oh, okay.
I thought you owned BTC based on comments on Gasem’s blog.
I’m tempted to take the BTC plunge but I have talked myself off the ledge so far. I prefer to invest, not speculate and I know next to nothing about cryptocurrency.
I think that baseball quote was from Warren Buffett originally.
Author
Thanks for the quote attribution and additional insights.
Interesting point here.
Question: Let’s say that you have way more than enough money to fully retire. For example, your cashflow passive income streams is 2x your annual living expenses AND you own 50 times your annual living expenses in liquid invested assets like a total market index fund that just keeps on appreciating and growing. Would you still not allocate any of your portfolio to play money? Truly curious.
Obviously, I’m not there yet. However, at some point last year I decided to dip more of my feet into play money with some of the speculative plays you’ve mentioned such as Tesla and BTC. Some of the reasons for this is because I already invest 50% of my after tax income in indexes and I had more money from not traveling. Travel is a considerable expense that’s part of our “wants/dream” bucket. A lot of that money eventually became my play money.
I will say that play money can indeed be dangerous. First of all, you have to be willing to lose it; and if that’s the case, then you could be considerably poorer compared to if you just invested in your regular portfolio. But the opposite case is dangerous too. If your play money balloons up (which mine kind of did), then you get a dopamine high and want to do it more. So you put a little more money in because of positive reinforcement. All of a sudden, your “play money” becomes real money (at least in paper assets) and then you have to make a decision of letting it ride, taking some off and adding it back to your regular portfolio, or what. Play money can be addicting if you do well and sometimes you may want to push it to see how far you can go. That addiction aspect of it could be quite dangerous.
Author
DMF,
I appreciate your thoughtful commentary, and you are far from alone among physicians in dipping toes into individual stocks. To understand where I’m coming from, allow me to explain my goals as an investor.
I don’t seek to be a “smart” investor; I want to be a considered coward, to avoid mistakes within my control and ensure the processes I use to guide my investments are sound. I don’t need to own the next unicorn; I do need to not die poor. Play money investors seek a disproportionate upside; my investing objectives focus on managing downside risk.
So investing is not my preferred form of play.
If I had that extra income or cash sitting around? That’s a Roth conversion, an investment property to create additional passive income, a contribution to our donor advised fund as a pit stop on the way to supporting charitable organizations, a 529 I can open for the child of a friend who chose a less remunerative career in the arts.
Or perhaps I get more frequent bike tune-ups, increase the travel budget for 2022, or we dine take-out a little more often.
I understand your desire to fund your wants and dreams bucket. When I want something to be funded, I assign my dollars a specific job with a previously agreed upon, acceptable level of risk to fund that activity over a reasonable time horizon.
I understand where you are coming from and I suspect far more folks share your approach than mine.
Respectfully,
CD
Not investing or investing in something like BTC or Tesla is simply a declaration of risk tolerance and narrative preference. I heard one of the leads on Real Vision poo pooing the recent BTC pull back with down his nose arrogance. The VERY DAY he was pooing to the second power, BTC was up 92% in a month. He then reared back on his haunches and proclaimed himself a “bond” investor. I come from the surgical side of the house. On my side, whip it out we’ll cut it off. Unless he’s levered short bonds, he’s been getting his ass handed to him. When bonds finally go real rate negative, you will pay the government to own them. So who’s the moron? The guy who made 92% in a month on some funny money or the guy who is destined to pay the government for owning their paper?
The universe changes all the time. You NEVER step in the same river twice. In the early 80’s Volker raised interest rates to 20%. Over the ensuing 40 years we rode that curve into the ground, doling out a little profit each year and the 60/40 worked because of it. The boomers got rich because during the same period Vanguard put together cheap index funds and you got to compound that run to ground in interest rates without active managers nickle and dime-ing you to death The universe has changed. The future in the next 40 years will be different. The pandemic and the ridiculous response has seen to that. 1929 1932 and 1937 it is thought, was a DIRECT outcome of the 1918 pandemic. Covid looks like it will be the third worse recorded pandemic. The first was the Black death which resulted in Protestantism and pilfering of Church lands into state coffers. 1918 as it worked through the world 11 years later led to world wide economic collapse and a second world war. God knows what Covid is going to lead to.
Life is a tight series of Bayesian probabilities. If you look at a Galton board and ending up in the right half of the distribution is “winning” the only way to do that is to as much as possible bias EVERY choice to lean right in it’s outcome. Some choices will still fall left, but the probability of ending up in the right half distribution increases with every succeeding generation of choices. Assuming the universe is constant is a BIG mistake. In my view BTC is a mispriced asset and will undergo multiple expansion UNTIL it is no longer mispriced and at that point the asymmetry will be gone and it will be time to find a new money machine. If you buy one at 40K likely the worst you’ll do is lose half your money. You may well make 5 to 10x. In a 2M portfolio 40K is 2% so you may loose 1%. That’s your risk. If it grows to 400K it’s now 20%. That’s the reward. That’s the bet, or you can own bonds which have a huge chance of paying the govt to own them.