Sunday Musings: Controlling The Urge

Based on the emails I have received over the past few weeks, it appears that there are a number of readers who have a hard time controlling the urge of jumping in on the long side of the market during any 2-day rally, or wanting to go short with vigor anytime a pullback occurs.

While it seems that you are missing out on profits during those times, you need to realize that this kind of bottom fishing can be hazardous to your financial health. Waiting for an identifiable trend to emerge is my preference and, given today’s volatility due to the various bursting bubbles, you’re better off being a little late with your commitments than being too early and getting caught in constant whipsaws.

While this is the prudent thing to do, I realize that there are all kinds of investors, and some have a certain gambling instinct that somehow needs to be satisfied. Short of traveling to Las Vegas, is there a way you can invest wisely and take chances at the same time without jeopardizing your hard earned investment capital?

Yes there is. Here’s what some of my clients have been doing for years. First, they divided their money into two piles; one small one and one big one. The small one represents their “play money,” while the larger one represents their “serious money,” which I manage for them conservatively.

With the play money they do all kinds of wild investments using options, volatile stocks and shorting anything that has a chance of going down in value. The idea here is to satisfy the gambling instinct knowing that, if they lost all of it, it won’t affect their retirement status or their quality of life. If they hit a home run, they’ll be talking about it at the next cocktail party to no end.

If this kind of thing matches your personality, you may be wondering how much is “play money.” There is no set answer and depends on your emotional make up. Look at a certain percentage of your portfolio and ask yourself if you lost it all, would it bother you? If the answer is yes, the assigned percentage is too high and you need to go lower until you reach your comfort level.

This is not meant for everybody to start divvying up their portfolios, it is meant to address an issue that has frequently come up, and I simply wanted to share with you what others are doing that have the need for “more action.”