The Idea Of “Core and Explore” Investing

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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)
Individual Stocks
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.

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  1. Jim Cramer espouses this pretty regularly. He basically says that your retirement is too important to speculate with and should be invested in index funds. That’s the whole “Mad Money” thing. After you’ve taken care of the important part, what you have left (that you can afford to risk) is your mad money, and you start looking at investments. He limits your truly speculative buys to 20% of your mad money portfolio, so a small percentage overall presumably.

  2. Amazing…

    This is exactly (exactly…) what I did the last time I re-evaluated and re-balanced my 401(k) portfolio. 80% in a target retirement fund and 10% each in two (emerging and european) to see what happened.

    Glad to see I was a trend setter in relation to this post 😉


  3. I have my retirement accounts indexed and my “play money” which is in a few individual stocks. My play money (explore) is approximately 5-8% of my portfolio. I haven’t lost money trading in there for the last 2 years, but my returns are about on line with the averages. I do find it enjoyable and it gives me some things to talk about with colleagues.

    I do try and keep trading costs down (4.95 at TradeKing, no minimums) and I don’t invest in options, commodity futures, penny stocks or other highly speculative ventures.

  4. The label “retirement” is rather arbitrary — money in non-retirement accounts work is accepted during retirement just like retirement money. For most people, the majority of their portfolio are retirement accounts so it’s much easier to do “retirement=safe, taxable accounts=play”. However, if you do have a significant amount of taxable accounts, it is more optimal to use IRAs and Roth IRAs for aggressive stock trading, put high yield indexes (bonds, reits, value) in 401ks and low-yields (growth) into taxable accounts.

  5. Kriton: is a better deal than TradeKing. Go to their web site to compare. They are highly rated by Barrons for their execution.

    Jon, one thing that you can do to minimize risk with individual stocks, invest in high quality ones i.e. blue chips, decent div paying ones (DRIP accounts!). Watch out for the really high div stocks like tankers and REITs. I’ve lost some money on those. AT&T has been phenominal!

  6. gradstudent says

    I have a Roth IRA eligibility question to which I haven’t been able to find an answer. I’m 26, an international graduate student on a student visa, and I’m wondering if there’s any restriction on “resident aliens” (that’s the term used for us) opening IRAs? Most eligibility lists talk only about income limits and not about visa issues. Any tips will be appreciated. Thanks!

  7. i have all money mixed between actively managed funds, index, and stocks. I tend to drift towards more actively managed funds b/c top preforming funds tend to do wll long term. However, i invest more by sector so when a fund is no longer on top or doing what i want, i switch to a better fund but still in the same sector.

    you know the phrase “Water water everywhere but not a drop to drink?” well, soon that will hold true even if ur not stuck in the ocean. invest in water my friend and in 10 yrs time, u will be a very very rich man.

  8. gradstudent – Google is your friend.


  9. Regarding what Matt said above, for an easy way to invest in some water stocks, check out the PowerShares Water Resources ETF (PHO). I own some shares of this. I agree what what Matt said: drinkable water is an underappreciated commodity right now. Some people say it’s the “next oil”. I’ve also heard that uranium is the next hot metal, but I digress…

  10. Gradstudent: are you planning on becoming a U.S. citizen and working and retiring in the U.S.? Because otherwise I wouldn’t see the point of a Roth IRA for you. But I would think anyone paying taxes in the U.S. would be eligible for a Roth. Call, you’ll get a live person on the phone instantly and they’ll tell you right away.

  11. just so you know about water, its not true at all

    desalination techniques are only ten years off from being perfect


  12. I love this idea (Core and Explore). I was about to discuss something like this as well but I like your coverage :). I’ll probably just post about how I’m actually applying these ideas.

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