The greatest minds in investing all seem to have the same advice: invest in the indices, and don’t try to beat the market yourself. Buffett, Dalio, even Morgan Housel, author of The Psychology of Money, all come to the same conclusion.
But something about that strategy never sat right with me.
Ever heard the story of the scorpion and the toad?
A scorpion, longing to traverse a river, spots a toad basking by the bank. The scorpion approaches the toad with a request– a plea to be carried across the water. The toad, wary of the scorpion’s notorious sting, hesitates, fearing for its life. “Why should I trust you?” he asks, his voice tinged with skepticism. The scorpion, in a tone laced with sincerity, assures the toad, “If I were to sting you during our journey, we would both drown. My request is borne not out of deception but necessity.”
Convinced by the logic, the toad agrees, allowing the scorpion to climb onto his back. They set off, gliding through the water. The toad’s strokes are steady, while the scorpion’s strokes are still. But midway, a sudden sharp pain jolts the toad. The scorpion has stung the toad, betraying their pact. As they both start sinking, the toad gasps in his final moments, “But why?”. The scorpion, meeting his own fate, simply replies, “It’s in my nature.”
I know when I was first starting my investment career, there was zero chance you could have convinced me to put everything into index funds. So instead, I went out and swung for the fences – angel deals, real estate, stock options – if it was risky and high upside, I loved it.
Looking back, I wish I had listened to conventional wisdom a little more. There are certainly some deals I wish I could take back, and I definitely could have used a little more safety.
But back in those days, I was a scorpion. There was a part of me that needed the thrill and the risk. There was no way I would have been content sticking every penny into boring old ETFs.
So what is the balance? How could I have made better decisions while remaining true to my nature?
Over the years, I began to advocate for a unique corollary to the sound advice of the greats: allocate up to 10% of your portfolio for ‘fun deals’. Think of it as a controlled burn to prevent a wildfire. If we don’t channel our innate risk-taking tendencies, they might manifest in suppressed, potentially destructive ways.
Imagine this: your investment portfolio is a lavish buffet. Most of it is nutritious and well-balanced. But there’s also that unknown yet appealing spicy dish – the 10% reserved for the unknown, the exciting, the ventures that might not align with traditional wisdom but will ignite your passion or tickle your interest of the month.
The unknown side of the buffet doesn’t just have to be about financial ROI. It could be for a cause you believe in, a quirky interest, or just for the sheer joy of it – like buying a supercar or a vacation home. Return on Happiness (ROH) is a real thing; sometimes, it’s worth its weight in gold.
Those wild deals might not always make you money, but they’ll give you a story, an experience, or a lesson. The trick is not to expect them to behave like your sure-things. These are the side hustles of your portfolio, the maverick investments that could pay off or just pay for a good time.
My two original mentors from Midland, for example, once bought a minor-league hockey team. Was it a sound financial investment? Maybe, maybe not. But the joy and community spirit it brought them both? Priceless.
Conversely, having a significant portion of your portfolio in ‘boring’ investments is essential. These are your bread and butter, the stable, reliable assets that keep your financial ship steady. They’re not glamorous, but they’re crucial.
The problem arises when, as entrepreneurs, we start to feel the itch for excitement in our investments. If we don’t have an outlet for this urge, it can lead us down some risky paths.
When you start making significant money, everyone from long-lost cousins to smooth-talking strangers will have a ‘can’t-miss’ investment opportunity for you. Having a pre-set budget for these speculative investments helps you say ‘no’ without FOMO. It keeps your main wealth intact while satisfying your appetite for risk.
Remember, being a good steward of wealth is all about balance. It’s understanding that while part of your success comes from taking risks, sustaining it comes from knowing when and how much (or little) to risk.
Your investment strategy should reflect this duality – a portion that’s secure and yielding, and a more minor, designated part that’s free to roam the wild side. This approach isn’t just about money; it’s about aligning your financial decisions with who you are and what brings you joy.
So, revisiting our dear scorpion and his unfortunate toad friend– this is about understanding your nature and planning for the options presented ahead of you. Allocate wisely, invest with a blend of prudence and playfulness, and remember: the best financial plan is one that not only grows your wealth but also enriches your life.
To making *nearly* every investment count,
Mb
