Investing for the Fun of It: Many fans of stock indexing set a little money aside to bet on riskier investments. Here’s how to do it safely.

Investing for the Fun of It: Many fans of stock indexing set a little money aside to bet on riskier investments. Here’s how to do it safely.


Oct. 18, 2013 6:06 p.m. ET


Investors flock to index funds because they are simple, inexpensive and often likely to generate higher returns than taking a chance on hot stocks, highflying money managers or a brother-in-law’s tips. The hitch: Passive is dull, as even its fans admit. John Miller, a partner in a Fayetteville, Ga., law firm, set up an account several years ago with about 5% of his investments and started buying individual stocks. Most of his investments are in index funds. He placed a wager on Bank of AmericaBAC -0.20% stock when prices were near financial-crisis lows, and won big. He also purchased shares in a solar-energy firm that he says fell about 85% before he sold. Through it all, he enjoyed himself—without worrying that a disastrous bet would ruin his financial future.“Some people have fancy cars that they spend money on,” says Mr. Miller, who is in his mid-30s. “My wife has a budget for fun, I have a budget for fun.”

Investing is serious business. Many Americans are in danger of falling short of accumulating enough money to retire in comfort and can ill afford to take unnecessary risks. Even people with more of a cushion don’t enjoy throwing away money.

But “play money” accounts are popular, particularly among people who believe they have amassed enough wealth to meet their needs or are on track to reach their financial goals. These investors get the kind of kick from playing the market that others might get from collecting art or sky-diving. Some might even dabble in other assets, such as currencies or gold.

The pleasure can come from the prospect of a big gain, or the chance to demonstrate professional expertise or to have a hunch confirmed. Like gamblers heading off for a weekend in Las Vegas, many realize they likely will come up short in the long run. But unlike many gamblers, the savvier investors carefully limit their wagers.

Some are ordinary investors, like Mr. Miller. Some are high-profile champions of passive investing, such as Burton Malkiel, an intellectual godfather of the index-fund movement, and Scott Adams, who has lampooned in his “Dilbert” cartoon fees charged by “active” managers. Unlike active funds run by human stock-pickers, index funds run on autopilot, holding a basket made up of virtually every security in an index, or market benchmark.

“A lot of people, myself included, have something of a gambling instinct,” says Mr. Malkiel, a senior economist at Princeton University and author of “A Random Walk Down Wall Street,” a classic argument against trying to beat the market.

Most of Mr. Malkiel’s investments are in index funds and, at age 81, he expects his portfolio is largely destined for his heirs. But he uses about 10% of his investment assets to buy and hold individual stocks, which he regards as “in some sense, a hobby.”

Profit often is only one of many motives driving these investors. They also might want excitement, something to aspire to, validation of their instincts and intelligence, or some other psychological payoff, experts say.

That points to the hurdles index investing faces. The percentage of all the money in stock mutual funds and exchange-traded funds that is passively managed has doubled in a decade, according to Vanguard Group—but still represents only about a third of the $6.5 trillion in such funds’ total assets.

I get enjoyment out of winning on stocks says one investor.

Index investors can count on returns that track a specific benchmark, minus typically low fees. Active investors, by contrast, face a constant threat of underperformance—and often pay steep management or trading fees which make that the likeliest outcome.

Nonetheless, if a financial adviser suggests a broad, diversified fund, many investors “react like someone told them they were going to live on spinach,” says Meir Statman, a finance professor at Santa Clara University in California and an expert in behavioral finance, the study of how investors make decisions.

Even investors who are financially secure are lured by the hope of a big payoff, Mr. Statman says. “We want two things in life: One is not to be poor, and one is to be rich,” he says.

Some investors say they find it easier to stomach putting most of their money into plain-vanilla index funds if they can actively trade with a small, safe amount, which allows them to balance the goal of managing risk with a desire to have the dice in their hand.

“It is kind of boring to just put money away,” says Joe Zawacki, who is 46 years old and runs consulting firm National Auditing Services, in Corunna, Mich. He used to trade individual stocks with about half his portfolio but was disappointed with the returns.

Mr. Zawacki now has about 90% of his investments in index funds, mostly the , which charges annual fees of 0.05%, or $5 per $10,000 invested. (Fees are higher for smaller investments.) Many active funds charge 20 times that much or more.

Early this year, Mr. Miller, the Georgia lawyer, started winding down his play-money account and decided to save more instead. He figures he probably didn’t lose money overall, because of his Bank of America profits, but believes he would have done better in an index fund.

“When you’re in Vegas, when you’re ahead, get out,” he says. “That’s what I did.”

Investors who have a play-money account, or want to start one, should first make sure they are setting aside enough to retire, experts say. That money should be in diversified, low-cost index funds, Mr. Malkiel says.

“For your serious retirement money, you don’t gamble,” he says.

Here are other steps experts say play-money investors should take to keep their expectations realistic and their wagers within safe boundaries:

Understand Your Motives

“I’m not private-plane rich,” says Mr. Adams, whose cartoon appears in about 2,000 newspapers in 65 countries.

But the possibility of hitting the jackpot is one reason Mr. Adams sets aside about 5% of his investments to bet on individual stocks. (The other 95% is mostly in broad, low-cost funds, he says.)

“Losing that money has no effect. But if something lucky happens, and it makes a lot of money, I’d be happy,” he says. “I might buy something that I might not have thought of.”

Investors can benefit from understanding what they get out of play money. That can help them figure out whether something else might satisfy that desire with less risk.

For some, stock-picking is a thrill. Researchers studying survey and trading data from German investors concluded that two types of people could find trading stocks entertaining: those who do it as a hobby and those who enjoy gambling.

The gamblers “are motivated by a quest for arousal or an aspiration for riches,” the researchers, Daniel Dorn of Drexel University and Paul Sengmueller of Tilburg University in the Netherlands, wrote in a 2009 paper titled “Trading as Entertainment?”

“I get enjoyment out of winning on stocks. It’s fun,” says Michael McKay, a general contractor in Palatine, Ill. He uses about 5% to 8% of his investments to trade individual stocks such as AppleAAPL +0.87% Amazon.comAMZN +5.84% Priceline.comPCLN +1.56% and Ford MotorF +0.40%

Mr. McKay previously devoted up to 30% of his investments to that type of trading, but pared back. “It was becoming too much like gambling,” he says. “I have a company to run. I can’t really dedicate the time.”

Play money also can provide intellectual stimulation. “I’m probably wrong nine out of 10 times,” Mr. Adams says. But when he is right, “it feels good,” he adds. “You can create the illusion that you’re smart.”

Prepare to Lose

In the late 1980s, Larry Swedroe had a hunch.

Mr. Swedroe, who is now director of research at Buckingham Asset Management, an investment advisory firm in St. Louis, believed that consolidation was coming to the banking industry.

As the U.S. pursued a free-trade deal with its neighbors in the years that followed, he bought up shares in Jefferson National Bank in upstate New York, near the Canadian border, figuring it was a takeover candidate. At one point, he says the stake comprised about 10% of his portfolio.

His theory about mergers in the industry was right, but it didn’t matter. The bank collapsed in 1993, and its onetime president was later convicted of fraud.

Now, Mr. Swedroe has a simple message for those who think they might have a magic touch. “You may get lucky. But I think the odds are highly against you,” he says.

Research backs him up. The average individual investor appears to underperform the market when picking stocks, even before the cost of trading is taken into account, according to a 2011 paper by Brad Barber, a professor at the University of California, Davis, and Terrance Odean, a professor at the University of California, Berkeley.

Among the problems: Those investors trade too frequently and often are competing against institutional investors who have more information, the authors wrote. Mr. Barber says there is research based on data from the U.S., Taiwan and Finland that points to underperformance by retail investors.

He says he knows of no studies specifically about play-money investors, but sees no reason why their results should be different. Almost by definition, a play-money account is likely to be less diversified and therefore riskier.

Many investors also are overconfident, experts say. Doctors, for instance, often don’t understand that professional investors’ skills also are specialized, according to Mr. Swedroe. When a doctor talks about picking stocks, Mr. Swedroe says he responds, “Would you let me operate on your patients?”

Play-money investors who want to find out if they are the exceptions should benchmark their trades against an appropriate index, he says. If investors are trading small-cap stocks, for instance, that means measuring against an index such as the Russell 2000, not the S&P 500.

Benchmarking, done right, will be eye-opening for many play-money investors, Mr. Swedroe says. “You’ll stop doing it, because you’ll see it losing.”

Set Clear Limits

Win or lose, the key to using play money safely is to make sure it involves a sum the investor can live without.

“Enjoy the fun of gambling and the thrill of the chase, but not with your rent money and certainly not with college education funds for your children, nor with your retirement nest egg,” John Bogle, Vanguard’s founder, wrote in “The Little Book of Common Sense Investing,” published in 2007.

Mr. Bogle wrote that what he called “funny money” should amount to no more than 5% of a person’s investments. Some experts put the limit lower. Mr. Malkiel says it depends upon the investor’s individual circumstances.

Getting the proportion wrong is one risk. Another is that an investor will lose, for example, 5% of his or her money and think, “I was so, so close. Let me take another 5%,” Mr. Statman says. The temptation to keep on trying to win is common, he says, and some people find it hard to resist.

Investors also have to decide what kinds of investments they think are reasonable. Some are more comfortable investing play money in diversified mutual funds run by active managers rather than picking stocks themselves. Mr. Bogle, in an interview, called that strategy a “mild form of the disease.”

Mr. Bogle is prone to bouts of the disease himself. He has a few investments that aren’t in index funds, though he says they amount to “nowhere near 5% of my assets.” He is an investor, for instance, in an actively managed fund, the , run by his son, John Bogle Jr.

The younger Mr. Bogle says the fund aims to deliver “good risk-adjusted returns” and says he believes there is a “place for that in many people’s portfolios.” As of Thursday, the fund has generated annualized total returns of 9.14% over the past 10 years, after fees, compared with 9.22% for the Russell 2000, according to research firm Morningstar.MORN +0.07%

Remember—It’s for Fun

Play money provides enjoyment to different investors in different ways. Alan Stern considers picking individual stocks “drudgery.” But the 60-year-old lawyer in Menlo Park, Calif., has a small chunk of his investible assets in an account that follows strategies developed by Joel Greenblatt, who has written about beating the stock market.

Mr. Stern does it out of “curiosity,” to see how Mr. Greenblatt’s theories work in practice. “I figure I can afford that much to test it out,” he says. Even if he concluded it did work, though, he says he wouldn’t follow the strategy for all his investments but would keep the bulk in traditional index funds.

It is important to remember that a play-money account is supposed to be fun, however an investor defines it. If play money stops delivering entertainment bang for the hard-earned buck, then it might be time to stop.

And don’t take yourself too seriously. If you look in the mirror and think you see Warren Buffett grinning back, it could be a warning that you might be about to do something foolish.

Some investors might find the intellectual challenge of studying a company or trying to figure out what will happen next to be pleasurable, after all. Or they might enjoy dreaming about an indulgent purchase—and, if a theory is proven right, making that purchase with the winnings.

Still, there are likely surer routes to accumulating wealth over the long haul. And there is greater enjoyment, the elder Mr. Bogle contends, in waking up as a retiree and saying, “This is fun. I don’t have to worry about anything.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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