I get it. Index funds are boring. Sometimes you want to scratch the itch and buy individual stocks, crypto, or gold.
I am not against “Funny Money.” I am just against doing it wrong.
If you are going to play the stock-picking game, follow these 3 rules to protect yourself:
1. The 10% Rule 📉 Never jeopardize more than 10% of your net worth. If your Funny Money goes to $0, you should still be able to retire. If you bet the farm and lose, you start over at zero. If you bet 10% and lose, you start over with 90%.
2. The “Roth” Preference 🛡️ The ideal place for speculative assets is a Roth IRA. Why? Because if you actually pick the next Amazon or Nvidia, you want those massive gains to be Tax-Free.
3. Avoid Taxable Accounts 🚫 Trading stocks in a regular brokerage account is a nightmare for two reasons:
- The Math: Short-term capital gains taxes (35%+) will destroy your alpha.
- The Mindset: You will hesitate to sell a stock because you don’t want to pay the tax bill. Taxes—not fundamentals—will start driving your decisions.
Keep your “Serious Money” boring. Keep your “Funny Money” separate.
#FinancialZen #InvestingTips #StockPicking #RiskManagement #RothIRA
Let’s be honest. Index funds are boring.
They work. They are the smartest way to build wealth. They are the foundation of everything we do at Financial Zen. But they are boring.
Sometimes, you just want to scratch the itch. You want to buy some Bitcoin ETF. You want to bet on a specific AI stock. You want to buy gold because you read a scary article.
I’m not going to tell you not to do it. I’m just going to tell you how to do it without blowing up your financial future.
Introducing: The “Funny Money” Account.
If you want to play stock picker, you need to segregate that behavior from your “Serious Money.” Here are the two unbreakable rules of Funny Money:
Rule #1: The 10% Hard Cap Never put more than 10% of your investable assets into your Funny Money account. 5% is better. 10% is the absolute maximum.
Why? Because of the “Blow Up” math. If you take 10% of your money and bet it on a biotech stock that goes to zero, you have a bad week. But you still have 90% of your wealth intact. You are not starting over. If you mix your speculative picks with your core retirement savings, one bad decision can set your retirement back by a decade.
Rule #2: The Location Matters (Don’t use a Taxable Account) Where you hold these stocks is just as important as what you buy.
- Best Place: A Roth IRA. If you catch a “moonshot” stock that goes up 1,000%, you want that growth to be tax-free forever.
- Second Best: A Rollover IRA. You can buy and sell without creating a tax event every time you trade.
- Worst Place: A Taxable Brokerage Account.
Why is a taxable account so bad for stock picking? Two reasons:
- Tax Drag: Every time you sell for a profit, you owe Uncle Sam. It eats into your returns.
- Behavioral Lock-in: This is worse. You might want to sell a stock because the company is failing, but you hesitate because you don’t want to pay the taxes. Or you don’t sell a winner because of the tax hit. Taxes shouldn’t dictate your trading, but in a taxable account, they always do.
The Bottom Line: Your “Serious Money” is for your freedom. It should be boring, diversified, and automated. Your “Funny Money” is for your entertainment.
Go ahead and pick stocks. Have fun. Just make sure you play in a fenced-in sandbox so you don’t burn down the whole house.