Tag Archives: core-and-explore

The dangers in the “Explore” part of a “Core and Explore” Portfolio

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By Michael J. Wiener

Special to the Financial Independence Hub

Many people advocate having a portfolio made up of mostly a core of low cost index funds along with a small “explore” part for taking concentrated risks on favourite investments.  This can work well enough if you’re realistic about it, but most investors cross the line to self-delusion.

Ben Carlson does a good job justifying the existence of explore-type investments in his article The Case for Having a Fun Portfolio.  After all, people are entitled to spend their money however they want.  Not every expenditure has to be part of a logical long-term plan.  We can buy a beer, or a motorcycle, or some favourite stock if we want.  So what if the long-term expectation is that the explore part of people’s portfolios will underperform indexes.

All the logic makes sense up to this point.  But just about every stock-picker I know can’t resist taking this a step further.  “Besides, the stock I picked is going to do great.”  In their hearts, they know their stock picks are going to outperform.  Past results don’t seem to deter them.  They wouldn’t bother with the explore part of their portfolios if they truly believed they would lose money over a lifetime of picking stocks.

All the evidence says that professional investors today set good relative prices so that individual investors who choose their own stocks are essentially making random picks.  The odds are against the small guy, but hope springs eternal.  I prefer to find hope in other pursuits.

Michael J. Wiener runs the web site Michael James on Money, where he looks for the right answers to personal finance and investing questions. He’s retired from work as a “math guy in high tech” and has been running his website since 2007.  He’s a former mutual fund investor, former stock picker, now index investor. This blog originally appeared on his site on April 26, 2021 and is republished on the Hub with his permission.  

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The trouble with core-and-explore

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Robb Engen, Boomer & Echo

By Robb Engen, Boomer & Echo

Special to the Financial Independence Hub

We all know how the story goes: You get a hot stock tip from your uncle who works in the oil & gas industry, or from your brother-in-law who works in the tech space, or from your mortgage broker (who’s an idiot).

I’m sorry, but just stop right there. No, Tiger Mike’s Drilling Co. is NOT going to be the next Suncor, and Flappy Bird (or whatever the kids are playing these days) is definitely not going to be the next Facebook or Instagram. And your mortgage broker is still an idiot, no matter what his day-trading recommendation was this time. So why are you listening to him?

Many investors obsess over fees, trying to shave tenths or even hundredths of a percentage from their mutual fund or ETF expenses. But some investors are willing to throw away those benefits by trying (and failing) to hit a home run picking junior mining stocks on the Venture Exchange.

“Play money” doesn’t belong in your retirement plan

The problem with a core-and-explore approach is when investors view “explore” as play money to gamble on risky penny stocks or the next up-and-coming trend. Was it play money when you first decided to save instead of spend your hard-earned dollars? Why is it different now that the money is in your brokerage account?

Why take that kind of risk with your investments? If you feel like gambling, go to a casino. “Play money” does not belong in your retirement plan.

I get it – it can be fun to try and find the next Microsoft or Google from a list of up-and-comers. But the odds of that happening are overwhelmingly not in your favour.

There’s a reason why most “hot stock tip” stories end up as cautionary tales for investors. So why do we keep doing it?

Remember, you don’t need to swing for the fences when a base hit will do just fine.

In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site [note the comments that follow it] and is republished here with his permission.