Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Some people call it "mad money"; others call it "play money." Morningstar's director of Global ETF Research, Ben Johnson, calls it funny money--those dollars that some investors set aside to swing for the fences and speculate. Ben is here today to discuss how to think about your pile of funny money.
Hi, Ben. Nice to see you.
Ben Johnson: Hi, Susan. Great to see you.
Dziubinski: So, Ben, you talked about this concept of funny money in a recent cover story of Morningstar ETFInvestor. What made you decide to take on the topic?
Johnson: Well, it's a topic that I've long thought about because it's something that I personally have long done in practice, putting aside a dedicated pot of money to effectively just play with when there are ideas that I have that I think are smart ones, that oftentimes panned out to be less than smart. There are other things that just frankly out of pure intellectual curiosity I want to explore. And allocating real money to that idea, to a particular stock or ETF or what have you, just forces that discipline to really dig in and do some research, and think long and hard about a particular topic.
So, I think there are any number of different reasons that investors might consider setting aside a pot of play money. I had never really seen any real serious research that had been done on it. So, we set out. We surveyed Morningstar ETFInvestor subscribers to get their take on it. We surveyed many of our colleagues just to explore this topic in a way that we hadn't seen it explored elsewhere before.
Dziubinski: So, let's jump ahead to how much money do you actually put towards that funny-money pile. What are some guidelines that investors should be thinking about when it comes to determining how much of their portfolio should be funny money?
Johnson:It's a great question and there are more than two rules of thumb. You've got extra thumbs at this point based on what we saw, what we surveyed, what we've seen others weigh in on. Some say no more than 5%. Others simply just try to ground it in what is an amount of money or a round figure--be it $500, $1,000, $10,000--that they could afford to lose entirely without losing any sleep over having lost all of that money when it potentially just goes poof. So, really sizing, I think, is a question that is inherently personal. I think how you frame that is going to depend on the investor in question, depend on their risk appetite, and depend on what's going to allow them to sleep or what might cause them to be sleepless at night.
Dziubinski: You said in the article that it's very important for an investor to have a plan for his or her funny money. And of course, part of that plan is, How much of my portfolio will be funny money? But what are some of the other things investors should consider?
Johnson: Well, I think the amount is absolutely critical. I think what's in play and what might not be in play with respect to the investment opportunity set is another thing to think about. So, are you looking to dabble exclusively in individual stocks? Are you going to sweep in during moments of market panic and buy closed-end funds at steep discounts? Are you going to buy crypto assets? You name it. Just knowing what your plan is with respect to what's in your investment opportunity set, I think, is critical.
The other thing to take into account is where you want to have this money. Do you want to have a dedicated account that clearly sort of quarantines that money from all of your other money, be it in your 401(k), your IRA, any taxable brokerage accounts you might have, so that there's no leakage, no contamination that you might risk with respect to the rest of your investable assets?
Also, do you want to have this be taxable money? Or would you prefer to invest this money in a tax-deferred account? Many investors we heard from prefer to keep their pot of play money in an IRA because they don't want to have to worry about the potential tax consequences of assets that they might be trading certainly far more regularly than they would some of their core accounts, accounts that are dedicated to specific long-term goals. So, all of these different considerations are things that investors should sit down and think long and hard about if they plan to formulate a very coherent and thoughtful plan, and document it with respect to their play money.
Dziubinski: You say in the article, and as we've discussed here, there are some pros to having this pot of funny money. One is, it can be very educational as you pointed out, it can be fun, it can be rewarding. But you also pointed out that it can also--perhaps if you have the ability to scratch that speculative itch with a pile of funny money, you won't do it elsewhere in your portfolio. You won't be taking undue risks elsewhere. So, those are definitely some pros. Let's start talking a little bit about some of the cons or the things to be careful of when you have that funny money that you're investing.
Johnson: Well, I think one of the potential drawbacks might actually be success, right? What happens in a scenario whereby you have this isolated IRA, your tax-deferred money that you've allocated to take a punt on a stock or bitcoin, or you name it, and it does phenomenally well and becomes in some cases maybe a material portion of your overall investable assets? I think this is where documentation and sort of decision-journaling can play a very valuable role, so that you can look back and really have a clear take on whether after the fact you did well by virtue of being smart, or more likely, at least in my own personal experience with the few successes I've had, just been lucky, just had a bout of dumb luck. I think having a sober assessment of whether you've been lucky, whether you've been good, all of the various thoughts and decisions that you've made along the way, can help protect you from having your funny money become a not-so-funny portion of your portfolio when you succeed. So, if there's a big risk, and this sounds very counterintuitive, it might be that you're so successful or otherwise just so lucky with your funny money that it becomes a big portion of your overall assets and that you might start rethinking some of your more mundane, core, long-term allocation decisions as a result.
Dziubinski: At the top of our conversation, Ben, you mentioned that you had surveyed Morningstar ETFInvestor readers to see, sort of, how they think about their funny money, what they're doing with their funny money. What did you find?
Johnson: We found a little bit of everything, Susan. Two very tersely worded responses that were, effectively, "There's nothing funny about my money," and "I would never, in a million years, consider allocating any portion of my investable assets to more-speculative pursuits," which is a perfectly acceptable answer. And then there were plenty of war stories that came through in the mail bag as well, that really ran the gamut from people who made significant allocations to Microsoft MSFT stock, for example, ages ago and just have let it sit and compound, and compound, and compound over decades at this juncture, which turned out to be a very wise investment in hindsight. To others, that saw their funny money effectively evaporate because they invested in something that after the fact turned out to be vapor for all intents and purposes. So, collecting those stories was really informative just in terms of how people think about funny money, whether they think about it at all, and the fact that what you would expect is really just about anything--that that money at one extreme could go away entirely, at another extreme it could grow to be an immense sum, and that investors should ground their expectations accordingly. And in all likelihood, it's going to be something in between.
Dziubinski: Ben, thank you for joining us today and sharing your thoughts on funny money. We appreciate it.
Johnson: Thanks for having me, Susan.
Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.
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