Posted By 
My latest MoneySense Retired Money column has just been published, and looks at whether speculation has any place in the portfolios of retirees or those almost retired. Click on the highlighted headline to access the full column: Should retirees speculate?
As I confess in the piece, even at the ripe old age of 67, Yours Truly has been known to indulge in the odd speculative investment, not always with positive results. You may have seen the oft-used distinction between “Serious Money” and Play Money, aka Fun Money or Mad Money. Mad Money typically means investing money you “can afford to lose,” which usually means relatively small amounts in individual stocks.
No one wishes to lose money, of course; on the other hand, the inevitable trade-off is risk and return. These days, young Millennial day traders congregate at the Robinhood platform: since the Covid crisis hit many of the most popular trades there would strike retirees as unabashed speculations: betting, for instance, that depressed airlines, hotels and cruise line stocks will soar once a Covid vaccine is available. The operative word with this cohort seems to be FOMO: Fear of Missing Out.
The advisors consulted in my MoneySense column say no more than 10% of your total equity portfolio should be allocated to speculations like penny stocks, marijuana, cryptocurrencies or other flyers. To me, speculations should be managed just like a venture capital fund approaches investing in risky startups: Of five specs, they figure one may go to zero, three break even and you hope the fifth results in the proverbial 10-bagger or even 100-bagger, assuming you’ve identified the next Apple, Amazon or Netflix.
Analogy to Las Vegas
While being governed by the 10% rule — which means the more you have the more you have available to speculate — personally I imagine myself in Las Vegas and set limits on what I intend to gamble with. (Let’s use that word, for in a way that’s what it is).
if I think there’s a reasonable chance a given “flyer” might go to zero, $500 is my maximum. If it is recommended by more than one source I might go to $1,000, or double that if it pays a dividend (generally a sign it’s not that speculative to begin with). Numbers will vary with your net worth and risk tolerance, but I can live with this approach: you can sell half on a double and “play with the house’s money” thereafter. By “equal weighting” your speculations, you spread the risk. So if your risk budget is $5,000, you might want to make five $1,000 bets on each or ten smaller bets of $500. The heartache of watching $500 go to zero should be alleviated by the joy of watching another $500 go to $5,000 or more.
We are really talking about the basic techniques of risk management and Asset Allocation, and matching one’s investment objectives to one’s future lifestyle’s goals. Aaron Hector, vice president of Calgary-based Doherty & Bryant Financial Consultants, says his firm doesn’t speculate because its mandate is capital preservation. But Hector will work with clients who want to play a bit in their own “play” accounts. Because of the high risk level and danger of losing capital, “the size of the play account should be set so that if there is a total loss it will not impact their ability to meet their financial goals.”
If you speculate, you must have an exit plan: “They should know at what point they are going to take profit, at what point they are going to cut their losses, and when that point comes (if it comes) then actually follow through with the plan.”
Toronto-based advisor and author John De Goey doesn’t generally recommend his clients speculate but for those who insist on risking some “fun money” he urges they invest no more than 10% of total investible capital.
What about gold and cryptocurrencies? If you’re looking for assets non-correlated to stocks, these might be as much risk-dampening tools as speculations. Personally I’ve always had a 10% gold position as a core defensive holding. In the article, I also pass along my more recent interest in dabbling with cryptocurrencies like Bitcoin or Etherium.
It should go without saying that if you don’t understand cryptos or any other speculation, you should refrain from investing in them.
