Even for boring index investors, it’s OK to have some fun with a gambling portfolio.
If you’re investing according to the sound advice in ETF.com, it should be boring. And though I am a big advocate for boring when it comes to investing—both my clients’ and my own—I also have a “fun portfolio.”
It may come as a surprise to my readers and clients, but beneath my dull exterior beats the heart of a gambler who just can’t resist acting on the thrill-seeking urge that indexing doesn’t satisfy.
So I tell all of my clients that it’s OK to have a little fun and carve out a piece of your portfolio to exercise the piece of their brain that wants to have a little fun. I call it a gambling portfolio.
Everybody should have their own system to outsmart the market. Mine is buying stocks that have fallen from grace that I think have about a 50 percent chance of going bankrupt. I don’t think professional money managers want to be caught holding a stock as it goes into bankruptcy so the stock price has possibly overreacted. It’s perhaps the ultimate value strategy.
I developed this strategy from working with some venture capital firms. For every 10 investments, they expect half to go belly up, two to four to survive but not make much, and one or two to be big home runs. I enjoy talking about my home runs like Priceline and Ford, but not so much about the losers like Eastman Kodak and countless others.
If the stock does go into bankruptcy, I write off the investment and get a tax loss. If it performs well, I either hold it forever or donate some to charity, never paying taxes on the gain. If I thought it was so brilliant, of course I’d never tell anyone my strategy.
In his book, “The Lazy Person’s Guide to Investing,” Paul Farrell notes the brain loves thrills and chills. He writes, “If you have two brains – you may need two portfolios.” Even with my Dare To Be Dull slogan, I’m not as boring as I seem.
So if there is an inner gambler in you, go for it, but do it with preset rules that will minimize your losses. Typically, the gambling portion allocated should be no more than 5 percent of your portfolio.
I tell clients their biggest risk isn’t that they lose their gambling portfolio, a much bigger risk is that they do well, think of themselves as the next Warren Buffett and then shoot for excitement with the entire portfolio.
Allan Roth is founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for CBS MoneyWatch.