Do You Have A Speculative Portion Of Your Portoflio?

I’ve been toying again recently with the core and explore idea of putting a few thousand dollars into my Zecco account and testing out some active trading theories like options, swing-trading, technical analysis, fundamental analysis, whatever. I finally feel like I have a large enough portfolio that a thousand dollars is only a few percent of the total.

The money is already there, I just haven’t pulled the trigger yet. Now, I don’t have better than a 50/50 chance of beating the market, but I do think it would be fun to try and I could learn some things along the way. Does anyone else have a similar account?

{democracy:3}

In addition, I’ll be openly sharing all of my trades, and keeping track of my performance very carefully. That’s what I’ve always wanted – to actually see people who actively trade reveal their true performance. (And mock them – like you’ll be able to do to me! :D )

Comments

  1. I was really burned on my single speculation. I went and looked at the corporate website. It was a broadband company. Motley Fool was pretty bullish on it. In my gut, I thought there was something about that website that was overly branded. Next time, I’ll trust my gut, though I know it’s a superstitious thing to say. $1500. Trust your gut. And if it starts to plummet, sell! Cut your losses!

  2. broknowrchlatr says:

    I would like to, but after 401k, 2 IRAs, an HSA, and a tiny ammount toward my kids college, I’ve got nothing left to save.

  3. willy j says:

    I’m studying for the CFA right now… the key thing that keeps coming up through my reading is that in the long term – trading theories are bunk and are short lived hence why there are always “new theories”. If you want to actively trade, I think you would be better off with speculating on firms that don’t have comparables that match other firms or buying a stock you think will go up in the long run. Given the recent stock market correction… I would think there would be room to identify “over corrections” on stocks you were looking at anyways. Options will just increase your breakeven – I wouldn’t even bother given the low dollar value.

  4. I think its a fun idea to try your own hand at the stock market. I recently started and think it adds variety – what’s the point in having some money if you can’t have a little fun with it? At this point, I’m trying to buy companies that I think I can hold on to for awhile, and have tried to buy them on a dip. We’ll see how it plays out.

  5. Read a Random Walk Down Wallstreet. You’ll find that if you want the most return for the least amount of risk, you invest in the largest collection of the market you can, and don’t cherry pick stocks.

    By the way, cherry-picking is one of the biggest mistakes that male investors make. Women usually are more cautious and less eager to find the next big thing that beats everyone, and that conservatism can serve them well–i.e. they don’t go buy Microstrategy stock in 2000 and lose all their money b/c some know-it-all friend told them it was hot.

    You may earn a lot of money by buying one or two stocks, but you shouldn’t put anything in to “play” with unless you are comfortable losing it completely or having it drop to 50% of its value. I personally don’t have a few thousand to burn like that.

  6. Why not just open up a play-money account somewhere to test your theories?

  7. I do – it’s about 0.03% of my total portfolio. I recevied a $50 bonus for signing up for a Sharebuilder account. I decided to gamble with the $50 and bought Sirius which is currently worth just north of nothing… Couple that to the fact that it costs $15 to sell the stock (which is worth much less than the purchase price), and I have just about nothing in the account.

    For me, it is much easier to just buy index funds and let time and the markets do the work for me. Right now I just don’t have the time or the knowledge to make effective stock moves. But I am ok with that. :)

  8. I do have a “speculative” portion in an ameritrade account, where I buy stocks based on speculation about the future in certain sectors or stocks. For example, since about March I have been “speculating” that REITs will do poorly over the next couple years, and so bought some SRS (2x negatively leveraged REIT index), and it is doing well so far (although highly volatile!). But the total amount in speculative trading is less than 15% of my overall portfolio, and in SRS in particular, less than 1%, so any potential damage done by a bad pick is very small. Still, it is much more interesting than just buying index funds all the time. One thing I will give Jim Cramer some credit for is that having some “mad money” to speculate with makes the market much more interesting.

    Other speculative plays that have paid off: GLD, IXC, T, and EWZ. Some that have not: SIRI, TOPT (of course it all depends on when you bought and sold). I do not trade options, but one of my co-workers likes to try, and he usually does well, but he has gotten killed a couple of times (NFI, ENT), and it only takes a couple bad picks to kill your return… so personally I find them too risky.

    When I take a look at my overall return over the past couple of years, I probably have done about the same as the market overall. But it certainly makes owning stocks more fun, and adds extra diversity to my portfolio. In the end, though, I find that it is very difficult to ever “sell” a stock since it is such a big tax hit come tax time, particularly if it has gone up a substantial amount. Taxes become much more of a challenge when you start trading. And, interestingly, as you speculate on more stocks, the overall return seems to average out to do about as well as the market, as you would expect!

  9. I have 75-80% of my total non-RE investments in highly speculative stocks right now. Then again, I am only 29 and willing to “roll the dice” to grow my money fast in the beginning – I dont want to be at my desk job much past 40 or 45, so to meet that goal I have to take more risk. I think once Im around 35, Ill start to be more responsible. However, the problem with speculative investing, it is quite addictive, so maybe it wont be so easy to switch over to ETFs.

  10. SavingDiva says:

    I was one of the people without enough money…I enjoyed the “you punk” at the end. It made me giggle.

    I think that even if I did have the money to speculate I wouldn’t. I am extremely safe with my investments. Maybe when I have more of a cushion I will feel less of an attachment, but I doubt it.

  11. Heather says:

    you forgot one option – no that’s silly, but I had to comprimise because my spouse wanted one.

  12. rocketc says:

    The most risky speculation in which I participate is in qualifying for bank bonuses. I have always wanted to try something like this on hedgestreet, however….

  13. I just opened a Zecco account and think it’s a perfect place to spend some “play” money on stocks that could make some quick bucks. I don’t know if I’d try option because option trading does carry fees.

  14. Jonathan,

    Sounds like you are deviating from the message you have been preaching for a while now — that you should stick your money into boring, low cost index funds. I don’t think its necessarily a bad idea, but why the philosophy change? Haven’t you done this before, but ultimately liquidated everything and put it back into index funds?

  15. I don’t think I’m really deviating, because it’s only going to be about 2% or less of my portfolio. Viewed another way, I’m paying $1,000 for entertainment for X amount of years and it’s really not actually part of my portfolio. But you’re right, I don’t think it deserves a space here. I will probably start a separate blog for it.

    I have invested in a few individual stocks before, but never actually devoted more than 5 minutes to actual effort into it, so I can’t say I that it was a completed experiment.

  16. “but I had to compromise because my spouse wanted one.”

    That’s basically an underlying option in everything that I do ;) But it goes both ways.

  17. Yes, I think right now it’s just a convergence of things for me

    (1) a broker is offering free trades
    (2) i have some disposable income, but also don’t want to buy “stuff” like a big TV or whatever.
    (3) my portfolio is large enough so that even if I do consider it part of my portfolio (which I probably won’t) it’d be only a few %
    (4) it’s something i’ve always wanted to try, but got (correctly) derailed by such books as Random Walk

    The more I think about it, the more I think I might just take away $1,000 and do this in secret or just on another blog. Doesn’t fit here.

  18. I too have a “play money account” in which I keep about $6k (funded with $4k as a Roth and have grown this year to $6). I treat the account separate and aside from my retirement investing and gamble here in a way I would not do otherwise. To date, it’s proven very successful on trades of RadioShack, Cognos, Toyota, and GE. I am normally hyper-conservative and this is a nice release and arena to test other theories, etc. Represents about .6% of net worth and 1.7% of money in market so the exposure is limited.

  19. I think we were all interested in hearing you regale us with stories from Las Vegas, and I think we would all be interested in what you do with your “entertainment” of stock picking as well. Sure it may not do as well in the long term, but as long as you don’t threaten your other goals, why not give it a whirl? And let us know your tales – maybe once every couple of months.

  20. I agree with Smith. At least try it!

  21. I believe Zecco does not offer free trades for Options. I am planning to open a Wells Fargo PMA account (since it offers free Options trading) and use some play money for Options trading.

  22. John,
    I believe even with a WellsFargo PMA account you are charged fees on options trading ($9.95/trade + $1.00 per contract):

    https://www.wellsfargo.com/investing/styles/independent/wt/com_fees/standard

    I think the free trades through PMA are only available to stocks/ETFs/mutual funds.

  23. What’s considered speculting exactly? I actually have a lot of my portfolio in individual stocks (though I’m trying to move a bit away from that), but they are all relaitvely low risk large cap value stocks that I plan on holding for long long time. Is that speculating?

  24. TallWes says:

    Why don’t you just do simulated trades on paper to prove your skills?

    If you’re looking for excitement take your wife to a casino and at least have some fun blowing your money.

    -Wes

  25. Steve Austin says:

    mike, “speculative investing?” No Such Thing.

    Jonathan, once you declare it speculative, by (Benjamin Graham’s) definition it is no longer in your *investment* portfolio. Having written it off as entertainment, as you have done, is the wisest course of action. It will be an expense, not an investment operation. Just make sure you don’t include it in your net worth reports until you are done having fun and bring whatever remains back into your cash accounts. You could always get lucky and make money off of your entertainment budget, like the occasional income-generating hobby. ;-\

  26. Juan De la Vega says:

    Trading = gambling, imo.
    You might have a few winning trades but in the end, the house always wins. Whether it’s $100000 or just $100, it doesn’t make sense to throw away money on speculative trades.
    I think value investing in individual stocks is a good strategy to beat the market.
    If you want to beat the market you can buy fundamentally strong but temporarily out of favor stocks.
    John Dorfman used to publish a quarterly ‘casualty list’ on Bloomberg.com. He no longer writes online but there could be some other sources where you can identify such value stocks.

  27. Steve Austin says:

    Dong, from the man himself:

    “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

    Notably, it’s not the financial vehicle itself that is either investment or speculative. It’s the financial *operation*: what you bought, when, and *how much you paid for it*. Coca-Cola bought at 40 today could be an investment, but at 60 today could be a speculation.

    So far as your portfolio is concerned, at what price and when did you buy what you hold in individual stocks? Just because the rest of your portfolio is in mutual funds, ETFs, real estate, whatever, doesn’t mean that they are investment grade. They could be speculative, too, e.g. if you own funds of Chinese growth stocks.

  28. I think the definition of speculative changes as you grow more financially mature. When I first started working I thought everything outside of CD’s and the GIC in my 401k (ie stock mutual funds) was speculative. After living with mutual funds for a while I went into individual stocks (my new speculative investment). Like Dong I’m buy and hold (to a fault, as I am still holding onto my losers) and now I pretty much consider the individual stocks part of my portfolio as I’ve grown comfortable with this financial vehicle. Next step would be options starting with covered calls (where you basically rent to own your stock to someone else with hopes that they’ll never want to own it). I don’t see myself going beyond put/call pairs but you never know after a few decades.

  29. Hey I just got an email from zecco that said they droped the account min to open to $0 among other things

  30. Steve,
    I raised my point with Benjamin Graham in mind. Most of the stocks I hold would not be considered speculative by his definition and as result I don’t personally consider them speculative. However one man’s investment is another man’s gamble.

  31. My brag:

    I don’t do individual stocks, but following a “core and satellite” (BTW: I like your “core and explore,” and plan to steal that; thanks!) approach, I have a big hunk from a previous life stashed in Vanguard’s Wellington Fund; the rest (which is roughly twice the Wellington slug) is all OVER the place:

    International 3%
    Int’l Small Cap 6%
    International Value 3%
    Japan 3%
    Latin America 3%
    China (indirect) 3%
    Emerging Markets 6%
    Emerging Mkts Debt 6%

    Micro-Cap 10%
    Small Cap Value 4%

    Biotech 5%
    HealthCare 3%

    Energy 3%
    REITs 4%
    Infrastructure 3%
    Worldwide Utilities 6%
    Commodities 9%

    Contrarian Guy 5%
    Technical Investor 5%
    Gunslinger Guy 5%

    FYI: My WORST year was 2000 when my returns were…0%. Yes, I am very proud of that–the best 0% I ever had!

    As for fees and what-not: I work for a fund complex, so no fees (of course, that is also the reason I cannot do individual stocks)…

  32. I kind of look at my whole E*Trade account as an experiment– I don’t do anything really crazy with it, but I definitely have bought a few stocks with a kind of “WTF” attitude…

  33. If you buy individual stocks your expected returns are actually slightly higher than an index fund (assuming $0 trading costs, like at Zecco). Of course your risk is also much much higher.

  34. SavingEverything says:

    I think you and your wife should go back to Vegas. Didnt you make out okay from your mid-April trip? Bring 1% of your portfolio with you; and you will surely have a fun time, and chances to return.

  35. Active trading sounds time consuming to me, and not in a good way.
    Say you spend approximately 4 hours a week engaged in active trading. Lets just round to 200 hours a year.
    And doing that you a pretty successful and earn a 30% return on your 2000 dollars. That $600 in pre-tax profit, or $3 an hour for your time. To me, that sounds like a terrible deal.

    But, if you really think that’s an enjoyable way to spend your discretionary time, what the hey.

    I do have a speculative portion of my portfolio, but I don’t “trade”, I just buy a few individual stocks and now and then and hold them.
    I don’t put much time into it.

  36. First off, I think it is a great to set aside some “play” money to have some fun with, especially if you are as young as you are with a lot of income ahead of you. One recommendation I would make is establish a firm sell rule. Mine is if the stock falls 10% below the buy price I sell. That way you cover your losses, a lesson I learned the hard way with a couple -80% dives. First one led me to index fund investing and the second I did not care too much about as it came from my “play” fund. in any case, find a strategy and a set of rules to minimize losses.

    On a seperate note I have been trying to put together and investment strategy for this specific purpose. I am building a database of all stocks, with key stats, historical prices and dividends, and income statements. The goal is to find stocks that fit all the basic stats well and then do followup research to identify the winners (or loosers if I am looking for stocks to short). For example find a small cap stocks with descent PE, solid margins, steady revenue growth, and a gorwing stock price. Then identify stocks that you think should continue growing. I am going to make the database web accessible for my friends and those interested. A website for frugally minded young investors with not much to invest, but the time, brains, and energy to find some potentially good deals. I will try to include some form of communication so we can grow smarter with numbers. In any case, it’s in the works.

  37. YOU’RE SILLY!

    Honestly, the number of people who continue to make active trades, even as a tiny fraction of their portfolio, astounds me.

    The poll is 325:90 now, and that figure astounds and saddens me. Can people not use logical reasoning to get over their emotional desires?

  38. Lousy Jack says:

    Jonathan,

    Regardless of what the ‘world’ says, its a matter of personal choice and affordability.
    Here’s how I look at things:
    I myself do have some ‘play’ money, but rather I’d call it ‘educational’ money.
    Like you said, options, saddles, swing trading etc.. heck I would never do that when I’m investing seriously. But that also means, if I don’t try it, I’ll never learn about it either.
    Yes, I can afford a few thousand dollars, if I loose it, I won’t fret about it. But in the end, I’ll have the experience of something which I usually won’t do. Its like going to vegas. :)

    I’d only recommend a thing – don’t try to make money from this ‘play’ money…. simply play with it.

  39. Steve Austin says:

    Ted, perhaps it’s better for folks who don’t (yet) acknowledge the emotional component to gambling to spend (as in entertainment, or even tuition) a small fraction of their portfolio for a few years? Better that than letting the emotions get out of control, get lucky with a few speculations, and suddenly have 10% of one’s portfolio in a risky line of financial operations. That’s a set-up for a significant loss of capital.

    I find it rational for Jonathan to wave the money off as an educational/entertainment *expense*, and not include it in his *investment* portfolio. Maybe he loses it all (or most of it) and never tries it again. Maybe he gets lucky and then takes his original expense back into his savings accounts, and continues on with “house” money. I gather it will be more fun for him to do this than to hit the casino or buy a new TV. ;-)

  40. Steve Austin says:

    Dong, I’m with you on that: “thorough”, “promises safety”, and “satisfactory” are all modifiers subject to the conditions and characteristics of the individual conducting the investment operations.

  41. If you have the means to maintain an “explore” account, what’s the harm? I use an account like this to periodically purchase low-risk individual stocks and have yet to take a loss in five or so years. I typically only hold the shares until I’m up 5-7%, then I sell. If the price dips, I wait it out. Admittedly, it’s a part (ALBEIT SMALL) of my portfolio that’s ill-conceived, fiscally-imprudent and hard to intellectually defend. But, it’s fun, measured and gives me reason to follow the markets as much or as little as I’d like. I consider it another means of diversification since 98% of my funds are in indexes.

  42. Jonathan,
    I say DO IT!
    And you can post your results on here casue I’d like to see them.

    I have my checking, saving, 401k, Roth IRA, and taxable investment accounts – all of what I consider my real investments. Most are in index funds as that is my strategy.

    However, I would like to open a Zecco account and do some buy and hold purchases in companies I believe in. It doesn’t have to be a lot of money. Even if I buy one share, it makes investing more “involved” than ‘set it and forget it’. Plus would I rather blow $50 dollars on something I’ll use/drink/eat/do once or maybe have something that could increase in value?

    Zecco makes this possible because they don’t charge for small trading and have no account minimums. Yes I could do it on paper for free and also have nothing to show for it. The sales fee makes sure you don’t trade too much and research companies before you buy. Some people buy comic books for fun, why can we buy stocks??

  43. clicclic says:

    Watch the 8/21 EMA
    Watch the RSI
    Watch the standard MACD (9/26)
    Always keep GTC stop loss orders in place

    If the MACD is moving up, the 8 day EMA crosses the 21 day EMA, RSI is up, and there are NO COMMISSIONS to worry about, TAKE THE RISK.

  44. Charlie says:

    Jonathan,
    I recently found your site, and love all the good stuff. Have you considered “advantage play” with regard to gambling games? I mean, seriously taking up poker and/or blackjack, and playing with an edge? (So not actually “gambling,” but investing, really.) As long as you have the edge, your long-run gain is guaranteed. And you would have a strong enough bankroll to realize huge gains over the long run. The swings (volatility) can be brutal, and the long run can be a long time in coming, but it’s a great gig. if you’ve got the stomach for it. Some good (i.e., beatable) bj games in OR, but you’d have to travel a bit. Also bear in mind it’s not easy to get the edge, but I’m sure you could learn to count cards for bj… and there are other plays you could learn too…

  45. I keep a small Roth account for speculative stuff — I think of it as a way of protecting the rest (majority) of my assets from any dumb moves that I might be compelled to make.

    A nice inbetween if you just can’t bring yourself to buy individual stocks are the various iShares ETFs for specific countries, like Brazil for instance. Still plenty of risk / reward… and you get to feel good about buying an index!

  46. You should do! I haven’t started on my “public” portfolio yet (still waiting on the funds). However, I’ve had the idea for a while now (maybe over a year).

    I also wonder what legal ramifications there are for this. Usually there needs to be some form of disclosure — say from people that work in the money management field. However, I do not manage anyone else’s money — AND the portfolio holdings are (or would be) publicly available.

    If anyone else want to create something like that, we can have a webring (or community of “open portfolio” sites.

    BTW, this is my purely speculative portfolio. It is separate from my “normal” portfolio.

  47. Charlie says:

    Jonathan,
    I saw your Vegas posts after I wrote the above stuff about advantage play. So you do know about coupons and card-counting and poker tournaments. That’s all good. If you decide to really go for it, you’ll find out other ways to increase your edge. Things like shuffle tracking, hole-carding, inducing dealer mistakes/mispays, etc…. You could beat up on a couple of Oregon casinos, but there would be some travel expenses involved. Anyway, consider it, and write about your experiences, if you get into it!

  48. circlefun says:

    hehe.. I am sure you will do it regardless… however, is it legal to post your trades openly here? I am not sure if people can charge you for trying to manipulate the stock price. If it is legal, I am interested to do the same myself :)

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