Do you know what “funny money” means? Would you like to try your hand at being a speculator and place a few bets without risking your financial future? It’s possible, and there’s a way to do it responsibly.
On the path to financial independence, which I’ve compared to climbing a mountain, we encounter a long and sometimes boring journey, where patience and discipline are essential.
However, during the long climb, it can be hard to completely ignore the sirens of the financial markets, the fear of missing out (FOMO), and social pressures. This is where the concept of funny money comes into play.
What Does Funny Money Mean?
Funny money represents that portion of your financial wealth that you can dedicate to more speculative investments, with one condition:
It should never exceed 5%
If managed wisely, this portion allows you to satisfy the adrenaline rush of trading without jeopardizing the safety of your main portfolio.
Burton Malkiel, the author of the famous A Random Walk Down Wall Street , which I’ve mentioned in other articles, said:
Anyone even remotely interested in the stock market has within them the soul of a gambler, a sentiment that’s extremely difficult to suppress.
By setting this 5% limit from the start, you won’t deprive yourself of your “adrenaline dose,” while ensuring that this need doesn’t compromise your mountain climb.
With this portion of your portfolio, you can make any speculative moves, such as trying to buy the next Microsoft or hunting for the next Bitcoin.
Be aware that it’s highly likely that, in the long run, you’ll lose money.
The Adrenaline of Trading
When I started as an investor, I also made speculative trades. I remember in April 2020, when oil futures went to zero for the first time in history, I bought a leveraged ETF. This unprecedented event, caused by a combination of low demand and concerns about storage capacity, drove the May contract for West Texas Intermediate (WTI) to close in negative territory.
Or when, during the Covid pandemic, I created my speculative “Travel & Leisure” fund by buying shares of airlines, hotels, and airports. I remember waking up at dawn to buy, through Interactive Brokers, the stocks of Tokyo Airport and Singapore Airlines.
Is It Worth It?
Even though all these trades eventually turned a profit, aside from the initial adrenaline rush and testing my IQ, I don’t think it was worth it.
The reason is simple: the effort required in terms of analysis and research before making an investment is significant. When you hold stocks, you often follow them obsessively, reading news and seeking confirmation from the media. On the other hand, the amounts invested are small percentages compared to total financial wealth. Even with excellent performance, the amount won’t significantly impact my net worth.
I’ve come to the conclusion that speculative trading and funny money aren’t for me, and I’ve decided to allocate this portion of my wealth to “alternative investments,” such as luxury watches.
The biggest lesson is that while a bit of speculation can be exciting, it’s crucial to keep the majority of our wealth in passive ETFs.
Funny Money or the Path to Financial Independence?
At this point, I think it’s time for a quick recap of the actions to take during the accumulation phase:
- Your savings capacity is an important lever both to fuel capital growth and to handle sudden market corrections. Keep liquidity between 5% and 10%;
- The tools to use are exclusively low-cost, accumulating, passive ETFs;
- Your portfolio’s volatility should not exceed 20%. Losses can be recovered, but only up to a certain limit;
- Time is your best friend—stocks always win in the long term;
- Accumulate consistently using value averaging (VA), rebalance annually, and avoid market timing;
- Dedicate a maximum of 5% to the “funny money” component.
In the next article, I’ll explain how investments in watches work, exploring another fascinating aspect of the financial world.
On avance!
