Do you see the data supporting index funds, yet still have the urge to try out some other theories? One way that financial folks try to resolve this conflict is with the concept of “Core and Explore” investing. I have no idea who came up with the name first, but essentially you split up your portfolio into two parts: a Core portion made up of low-cost index funds, and a Explore portion with which you can do whatever you want. This way, you can still watch CNBC, talk stocks around the water cooler, and try to decipher Cramer’s squealing. You get the rush of working to beat the market, but in the worst case you won’t fall too far behind.
Core Ideas (80-95% of total portfolio)
100% Target Retirement Fund, or
33% Total US Stock Market Index, 33% Total International Index, 33% Total Bond Index, or
Something based on one of these model asset allocation portfolios.
This part should be rebalanced regularly according to your pre-set asset allocation.
Explore Ideas (5-20% of total portfolio)
Actively Managed Mutual Funds
Options and Futures
Sector bets (Healthcare, Energy)
Currency Exchange, Gold, Commodities
Country bets (China, Russia, Japan, Brazil, India)
Market Timing (i.e. switching to 100% cash when bearish)
Many people mix index and non-index funds, but not necessarily consciously like this. I did have a “play money” account that I put a flat $5,000 towards before (as opposed to a percentage of my portfolio), but then I got busy/bored/disillusioned and liquidated it six months ago. I keep planning to revive it, but it just hasn’t made it up the priority list yet.