Mixing Investing With Entertainment Is A Bad Idea
I worry that the young adults who are dipping their toes into the investing world for the first time this year will associate investing with a gambling sort of rush. But I also can understand where they’re coming from. It is exciting to see small investors make out like bandits in companies like GameStop, AMC, and others.
But if logging onto your investment account gives you the same feeling as other forms of entertainment (playing the slots, going to the movies, etc.), take caution – this has ended badly before.
In the 1630’s everyone was an expert on Tulips (yes, the flower) – prices eventually dropped 99% in a year.
In the 1800s, everyone was an expert on exotic foreign colonies, which in some cases never existed in the first place.
More recently in the 1990s, your neighbor’s sister’s cousin was an expert on hot new technologies companies.
The problem with owning what excites us is that being excited in the first place is not a good investment behavior. Warren Buffet says “Benign neglect, bordering on sloth, remains the hallmark of our investment process.” There is just no way for me to feel that way about something that has gone up or down by 100% in a day.
If you feel inclined to invest for entertainment, I have two rules for you to consider.
Call it what it is – This is fun money. Don’t mix this money with your retirement funds or other investments working toward your long-term financial goals.
Invest only what you can afford to lose – Invest only what you can afford to lose without making changes to your quality of life now or in the future. If that is the case, then this can be considered entertainment money in the same way that going to the movies would cost you money. It’s hard to put an amount on this, but I personally think it should be kept to less than 5% of your investments.
Thank you for reading,
Alex
This blog post is not advice. Please read disclaimers.