One of the first things I did once I reached the age of majority was open a brokerage account where I could buy stocks and other investments based on my research. Shortly thereafter I discovered the ease of mutual fund investing.
I never made the mistake of excessive trading or buying a “hot” stock I heard about at the local pub. I tended to stick with local, regional or very large companies. I choose local and regional companies regardless of size because I could jump in the car and easily visit them. These smaller companies rarely had investors (or a potential investor) show up at their doorstep. But I did.
Big companies thrilled me because they also had a history of increasing dividends (at least the ones I bought). Big companies can weather an economic downturn better and have more resources. However, the big companies were also slow in responding to a changing environment.
Periodically I dipped into bonds in a minor way with my mad money account. I can’t recall ever owning a bond mutual fund. When it came to bonds, though, I never hung around for long.
Another advantage of a mad money account is the ability to spike returns. Sometimes—not often, but sometimes—I used options to either buy a stock by selling puts. Less often I used covered calls to generate additional income. These strategies are a double edged sword. A naked put might bring in additional revenue, but if the stock climbs higher your resources would have been better utilized owning the stock rather than getting cute in an attempt to pull an extra thousand or so in option premiums. Covered calls had the opposite problem. Sometimes a stock runs too far, too fast. But trying to figure out a top is nothing short of insanity. Covered calls can work, but you risk the stock climbing over the strike price.
Okay, enough of the technical stuff.
Levels of Mad Money
My portfolio has many layers. I own real estate: commercial and residential, including a modest amount of farm land. I keep one ounce of gold just to say I have some. Technically, my business is an asset and an investment; treat her well and she adds to my net worth. Alternative investments are a small part of my portfolio. I’ve teased Lending Club, Prosper and Peer Street; nothing significant, but enough to gather an understanding of the investment.
The bulk of my money is in securities. Index funds are my largest holdings (70% S&P 500 and 30% international) by far. Then I have two levels of what I call mad money. The higher of the two levels involves long-term investments with massive unrealized capital gains. Johnson & Johnson, Aflac, ITW, Altria and Phillip Morris fall into this category. This isn’t the mad money account I’m planning on disposing of.
The lower level mad money account is where I play with all my crazy ideas. This account also holds more of my recent purchases, including: TSLA (recently disposed), AAPL (a slow build meaning it will end up in the higher level mad money account eventually), NFLX (recently disposed), FB (still own) and a few other stocks. This mad money account is where I experiment with all the crazy ideas that come to me in the cold sweat of the night. I test option strategies with the expected results. (Sometimes I look like a hero with my options ideas, other times it gets ugly.) I’ve been known to buy a few shares in this account just to keep an eye on a stock. And then there is the downright stupid stuff. I’ve been calling for higher inflation and interest rates for five years now. Bought the TBT ETF on and off and am still waiting for a profit. Oh, well.
Wheat from Chaff
The low-level mad money account is in the process of elimination. It wasn’t some catastrophic loss irritating me that has me licking my wounds. Rather, it is something more valuable tearing me down.
Over the years I noticed I spend virtually no time on my real estate. I’m not even 80% sure what my real estate is worth. I own it and that is good enough.
Even alternative investments take no time. A token amount in Peer Street or Lending Club (account down to the last couple thousand as we speak) are more on automatic than anything.
The business might be considered an investment, but it is also what I do to fill my day with meaningful activity so I don’t consider it a burden.
Then we have the retirement accounts (all invested in index funds) and non-qualified accounts. I look at my Vanguard account a few times a year max and it takes maybe fifteen minutes if the internet is running slow.
The high level mad money account isn’t really mad money; it’s a listing of very long-term investments. I spend virtually no time on this money either. I’m not selling unless there is a serious reason to do so. Normal ups and downs of the market don’t count. My biggest issue with this account is what to do with the ever increasing dividends.
Finally we come to what most people consider mad money, the low-level account in my portfolio. This is fun money; play money. Except it isn’t so fun anymore.
It’s been a good year for the mad money account, but at the end of the day the rate of return over the gains index funds are providing isn’t enough to cover my time, the real loss I suffer with a mad money account.
For 35 years I enjoyed a frivolous mad money account to assuage my lust to play and trade while my serious money stayed fully invested, safe and sound, in broad based mutual funds and later index funds. And after 35 years my lust to trade is gone. Zilch! And with no desire to play with my money I still find myself checking the account every single blasted day! Gotta check on an insane option trade with a whole $300 bucks on the line (that was last week). How is this little nugget doing? Maybe I should research this company for consideration in my portfolio? Ugh!
Process of Elimination
Taxes are a consideration. No fire sale for me. But I have come to a point where I no longer want to feel the daily pull of checking what amounts to a few percentage points of my portfolio. More (if I should make a good call and win) will not change my lifestyle. Not even a stitch. So why am I spending so much darn time on it? Good question.
I started liquidating the account earlier this summer as I decided to reclaim the time suck the account demands. Remnants will remain into next year. As I downsize the account with a firm rule of adding no new stuff frees more and more of my time. This last week I put a serious dent into the holdings, liquefying them. Which leads to another serious question:
What Will I Do with My Money Now?
Good question. Glad you asked.
Notice I said I would keep my higher-level mad money account. Rather than the games played with the low-level mad money account I only make serious, well-researched, investments in the upper level mad money account. And I plan on adding to those investments over time.
AAPL is a serious long-term investment. They are dominant in their market with loads of cash and a cult-like following. At the right price I might add to MO or JNJ. Of course this takes time, too, but I control the time investment. It certainly isn’t a daily routine. TSLA is a great concept company, but also very risky and not destined for my serious money portfolios until the day it holds a position similar to AAPL’s. NFLX is another example with future promise, just not today in a serious money account. FB is on the fence. If FB dropped to 130 I would be very interested. FB’s dominant market position is an advantage. But management missteps have me watching more than buying until they convince me otherwise. Bad management can ruin a good company.
Once upon a time I owned a large real estate portfolio. Today my RE holdings are worth maybe $700k or so. (I’m guessing.) In California that would buy a lot to park your mobile home. In Wisconsin it buys an office building, two residential properties and some farm land. At some point, if the right property in the right place appears, I might slowly rebuild my RE portfolio. Investment properties this time around will be fully automatic with property managers doing all the work while I allocate capital and make major spending decisions only.
And let’s not forget index funds. If I’m allowed to fill a retirement account, I will. The rest can reside in a non-qualified account forcing me to claim dividends on my tax return.
I don’t rule out other alternative investments either, but unless something really trips my trigger I will allocate the smallest of amounts to this area of my portfolio. Maybe a bit more to Peer Street. Maybe.
And if interest rates ever climb I might buy 30-year Treasuries to hold until maturity. It will take 8% or higher yields for me to start allocating something in this area which means this is a distant future event at best.
Smart Investing Decisions
Future investments will not be based on a hunch or some other crazy idea. Yes, I made a killing on TSLA, NFLX and FB. If anyone is paying attention, my lifestyle didn’t change one iota. And since I’m no longer enjoying that part of the game anymore it is time to move on.
Long-term investments require deeper research and more conviction. What is tolerated in a mad money account is not acceptable where serious money is involved. Serious money makes fewer, but larger, investments. That is where I’m at in my life. We had a great run and my interests are changing. I have new things to explore, things I want to do.
If you need a mad money account to keep yourself honest with the serious money then you should keep the mad money around. If you find you have evolved, as I have, then make the change.
There is nothing wrong with change as long as you’re having fun.
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