The Fun Money Allocation Rule
Index 85-95% of your portfolio, then play with the rest guilt-free.
Schultheis acknowledges a reality that most index fund advocates ignore: many investors have an emotional need to compete, gamble, or participate directly in the companies they admire. Rather than fighting this instinct -- which typically leads investors to abandon indexing entirely -- he channels it constructively by establishing a clear boundary.
The rule is simple: index 85-95% of your stock portfolio to ensure the vast majority of your money keeps pace with the market average. Then allocate 5-15% to individual stock picks for fun, competition, and personal engagement with companies you believe in. This structure satisfies the emotional need without risking the financial outcome.
The critical behavioral rules for the fun money are: pick individual stocks (not managed mutual funds, which defeats the purpose of having fun), invest in companies you know and understand, keep your emotions of fear and greed in check, compare your stock-picking results against the market average annually (which will usually humble you), and have the courage to admit mistakes and sell losers.
- The desire to compete and pick stocks is natural and should be channeled, not suppressed.
- You should be the one having fun with your money, not a mutual fund manager having fun at your expense.
- Invest in companies you know, understand, and whose products or people you admire.
- Compare your stock picks against the market average annually -- this keeps ego in check and provides honest feedback.
- Secure Your Core Portfolio FirstEnsure 85-95% of your stock portfolio is invested in index funds according to the diversification framework. This money is not to be touched for stock picking, no matter how compelling an opportunity seems.Pro tipThink of the indexed portion as the foundation of a house. You can decorate the interior however you want, but you never remove structural walls.WarningIf you find yourself wanting to allocate more than 15% to individual stocks, you are no longer playing -- you are gambling with essential retirement money.
- Pick Stocks You Know and UnderstandFor your 5-15% fun allocation, invest in companies whose products you use, whose employees you respect, and whose business model you can explain simply. Avoid obscure companies with no track record of profitability, regardless of how exciting their story sounds.Pro tipA stock is more than a three-letter symbol. It is a share of a company with real people doing real work. Invest in companies where you have firsthand knowledge of their quality.WarningDo not get caught up in Wall Street metrics like 52-week highs, price-earnings ratios, and long-term debt analysis. If a company has great products, great service, and great people, those fundamentals will eventually be reflected in the stock price.
- Keep Score Against the Market AverageAt year-end, compare the return of your individual stock picks against the stock market average for the same period. This provides honest feedback about your stock-picking ability and either humbles you or gives you legitimate bragging rights.Pro tipEvaluate your picks in context: if your stock is down 20% but the market is down 15%, the underperformance is only 5%, not 20%. Context prevents premature selling.WarningIf your fun money consistently underperforms the market average, consider whether the fun is worth the cost -- or whether you would have more fun with the additional money at retirement.
A client continued to invest in Schultheis's stock picks despite consistent underperformance. When asked why, he replied 'It's fun!' with the same attitude he brought to climbing dangerous mountains. He accepted the risk as the price of entertainment.
Schultheis suggests buying Nordstrom (great customer service you experience firsthand), Microsoft (software you use daily), or Boeing (airplanes whose quality you can observe). These are companies where personal experience provides genuine insight into business quality.
The framework originated from Schultheis's own experience as a stockbroker and from a client who invited him mountain climbing. When asked why he kept investing in Schultheis's underperforming stock picks, the client replied matter-of-factly: 'It's fun!' This honest admission inspired the recognition that fun has a legitimate place in investing -- but only within carefully controlled boundaries.