Do you have a “play money” allocation in your investment portfolio? Investing can be quite simple. Mike Piper has a one-fund portfolio. Many Bogleheads, followers of the late John Bogle’s investing philosophies, embrace a three fund portfolio.
These are effective ways to build wealth over time via continual additions and compounding. They’re also rather boring, and there’s absolutely nothing wrong with that.
What is Play Money? Ideally, it’s a fairly small allocation, although I feel it’s reasonable to increase the percentage as your net worth increases, particularly when you’re financially independent and then some.
If the small business takes off, your stock picks are stellar, or your farmland is fruitful, you can expect to earn higher returns with your play money than you do in the rest of your portfolio.
A good starting point is to limit play money to no more than about 5%. The riskier the assets you seek, the smaller that allocation should be.
Once you’re beyond financially independent (FI), that is, you have all the money you and your family will need to last a lifetime, I grant you permission to increase your play money even higher.
It’s important to limit your play money allocation, especially when you’re older and have fewer years to make up for mistakes.