I have mixed feelings about the rampant speculation we’re seeing in the markets these days.
On the one hand, there’s a huge difference between speculation and investment. Many investors are learning the wrong habits these days and eventually that’s going to come back to bite them.
On the other hand, you can’t expect everyone to invest like a robot. We humans are emotional and those emotions are neither good nor bad in most cases, they just are. It’s impossible to fight them completely.
I used to be in the robot-only camp when it came to investor behavior but I’ve changed my tune over the years after dealing with enough humans. Some people simply need to speculate or take some risks they wouldn’t normally take with the rest of their portfolio.
Here’s a piece I wrote at Fortune making the case for a fun allocation in your portfolio.
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According to the Centers for Disease Control, just over 13% of Americans were considered obese in the 1960s. That number was similar throughout the 1970s.
Then in the 1980s and 1990s obesity numbers shot up to more than 30% of the population. Today more than two-thirds of Americans are either overweight or obese.
This dramatic increase in obesity in America coincided with an explosion in exercise and diet plans available to the public. In fact, according to dietary researcher Mark Schatzker, Americans collectively spent $1 trillion on weight-loss solutions between 1989 and 2012. Despite all this money thrown at weight-loss solutions, obesity in the United States grew by more than 50%, while extreme obesity doubled.
How could this possibly happen?
Everyone knows exactly how you lose weight and stay in shape—eat well and exercise regularly. The problem is knowledge is not enough to change behavior for the vast majority of the population. Knowing what to do and actually doing it are completely different things.
The same is true when it comes to investing. There are no guarantees when it comes to the markets, but your highest odds of success generally come from thinking and acting for the long term, keeping your expenses low, and avoiding big mistakes at the worst possible moments.
Unfortunately, thinking and acting for the short term when it comes to your portfolio is even more tempting than a hot fudge sundae to a person on a diet.
Now, many people in the investment world will advise you to suck it up, stay disciplined, and follow your long-term comprehensive investment plan. And I agree with this advice…up to a certain point.
You can’t simply expect each and every investor to toe the line and invest like a robot. The majority of investors would absolutely perform better if they did invest like a robot. But human beings are not robots. We invest based on status, emotions, and identity.
Therefore, I recommend that everyone who can’t invest like a robot at all times carve out a piece of his or her portfolio to have some fun.
Here are some reasons to have a “fun” portfolio:
It helps to have a cheat day
One of the reasons 95% of all diets end in failure is it’s impossible to be perfect at all times. That’s why the best diets allow for a cheat day here and there, to let yourself go wild and eat what you want.
The same concept applies to portfolio management. Carving out a small piece of your portfolio, call it anywhere from 5% to 20%, offers the ability to cheat on your investment diet.
As long as you have the majority of your portfolio following a long-term plan, you can go nuts in your fun portfolio. You can pick stocks or other speculative investments, time the market, or invest in things you wouldn’t dare put your money in with your non-fun portfolio.
You need a behavioral release valve
Willpower is fleeting because the human brain is like a muscle in many ways: Eventually, it needs to rest. This is why it pays as an investor to automate good decisions ahead of time. The best investment advice the majority of the time is to do nothing and simply follow your long-term investment plan and get out of your own way.
But we humans also feel more comfortable if it feels as if we have our hands on the steering wheel. Investors have no control over what happens in the markets, but it puts us at ease if it feels as if we do, especially when markets are going haywire.
Behavioral researchers have determined people have an illusion of control when many choices are available; there is a large amount of information available, and you have a personal stake in the outcome of the choice. This is a perfect description of investing in the financial markets.
The beauty of a small allocation to a fun bucket within your portfolio is it allows you to scratch an itch, therefore leaving the rest of your portfolio alone.
You can test your ability
Determining the difference between skill and luck is not always easy when it comes to investing. But many investors would like to know whether they’ve got what it takes to outperform the market.
With a small allocation to a fun portfolio, you could test your abilities as an active investor by comparing it with your more boring, low-cost, long-term investments. That way you know whether you’ve got what it takes, or you have a front-row seat to how hard it can be to outperform the market.
There has never been a better time in all of history to be an individual investor. Fees are on the floor, investment options have never been more plentiful, and technology has leveled the playing field in a number of ways.
Yet all of these positives could also be considered negatives because of all the temptations to overtrade and speculate. The fear of missing out has never been greater. There are a plethora of investment securities, funds, and strategies to invest in.
One of the best way to combat these negatives is not to ignore the emotions they bring about but to lean into them. A fun portfolio can be useful to investors, as long as it allows you to leave the rest of your portfolio alone.
This piece was originally published at Fortune.
