Why I’m Getting Rid of My Mad Money Investment Account

FU money and investments can be a lot of fun, but demand incredible amounts of time. Time is your most valuable asset. The best investment ideas and tips are automatic. #wealthyaccountant #investments #investmentideas #investmenttipsOne of the first things I did once I reached the age of majority was open a brokerage account where I could buy stocks and other investments based on my research. Shortly thereafter I discovered the ease of mutual fund investing.

I never made the mistake of excessive trading or buying a “hot” stock I heard about at the local pub. I tended to stick with local, regional or very large companies. I choose local and regional companies regardless of size because I could jump in the car and easily visit them. These smaller companies rarely had investors (or a potential investor) show up at their doorstep. But I did.

Big companies thrilled me because they also had a history of increasing dividends (at least the ones I bought). Big companies can weather an economic downturn better and have more resources. However, the big companies were also slow in responding to a changing environment.

Periodically I dipped into bonds in a minor way with my mad money account. I can’t recall ever owning a bond mutual fund. When it came to bonds, though, I never hung around for long.

Another advantage of a mad money account is the ability to spike returns. Sometimes—not often, but sometimes—I used options to either buy a stock by selling puts. Less often I used covered calls to generate additional income. These strategies are a double edged sword. A naked put might bring in additional revenue, but if the stock climbs higher your resources would have been better utilized owning the stock rather than getting cute in an attempt to pull an extra thousand or so in option premiums. Covered calls had the opposite problem. Sometimes a stock runs too far, too fast. But trying to figure out a top is nothing short of insanity. Covered calls can work, but you risk the stock climbing over the strike price.

Okay, enough of the technical stuff.




Levels of Mad Money

My portfolio has many layers. I own real estate: commercial and residential, including a modest amount of farm land. I keep one ounce of gold just to say I have some. Technically, my business is an asset and an investment; treat her well and she adds to my net worth. Alternative investments are a small part of my portfolio. I’ve teased Lending Club, Prosper and Peer Street; nothing significant, but enough to gather an understanding of the investment.

The bulk of my money is in securities. Index funds are my largest holdings (70% S&P 500 and 30% international) by far. Then I have two levels of what I call mad money. The higher of the two levels involves long-term investments with massive unrealized capital gains. Johnson & Johnson, Aflac, ITW, Altria and Phillip Morris fall into this category. This isn’t the mad money account I’m planning on disposing of.

The lower level mad money account is where I play with all my crazy ideas. This account also holds more of my recent purchases, including: TSLA (recently disposed), AAPL (a slow build meaning it will end up in the higher level mad money account eventually), NFLX (recently disposed), FB (still own) and a few other stocks. This mad money account is where I experiment with all the crazy ideas that come to me in the cold sweat of the night. I test option strategies with the expected results. (Sometimes I look like a hero with my options ideas, other times it gets ugly.) I’ve been known to buy a few shares in this account just to keep an eye on a stock. And then there is the downright stupid stuff. I’ve been calling for higher inflation and interest rates for five years now. Bought the TBT ETF on and off and am still waiting for a profit. Oh, well.




Wheat from Chaff

The low-level mad money account is in the process of elimination. It wasn’t some catastrophic loss irritating me that has me licking my wounds. Rather, it is something more valuable tearing me down.

Over the years I noticed I spend virtually no time on my real estate. I’m not even 80% sure what my real estate is worth. I own it and that is good enough.

5 Ways to spend less time of your investment ideas. Investment tips for beginners and experienced alike. Investment management and portfolio. #wealthyaccountant #investment #investment portfolio #investmentreturns #investmentideasEven alternative investments take no time. A token amount in Peer Street or Lending Club (account down to the last couple thousand as we speak) are more on automatic than anything.

The business might be considered an investment, but it is also what I do to fill my day with meaningful activity so I don’t consider it a burden.

Then we have the retirement accounts (all invested in index funds) and non-qualified accounts. I look at my Vanguard account a few times a year max and it takes maybe fifteen minutes if the internet is running slow.

The high level mad money account isn’t really mad money; it’s a listing of very long-term investments. I spend virtually no time on this money either. I’m not selling unless there is a serious reason to do so. Normal ups and downs of the market don’t count. My biggest issue with this account is what to do with the ever increasing dividends.

Finally we come to what most people consider mad money, the low-level account in my portfolio. This is fun money; play money. Except it isn’t so fun anymore.

It’s been a good year for the mad money account, but at the end of the day the rate of return over the gains index funds are providing isn’t enough to cover my time, the real loss I suffer with a mad money account.

For 35 years I enjoyed a frivolous mad money account to assuage my lust to play and trade while my serious money stayed fully invested, safe and sound, in broad based mutual funds and later index funds. And after 35 years my lust to trade is gone. Zilch! And with no desire to play with my money I still find myself checking the account every single blasted day! Gotta check on an insane option trade with a whole $300 bucks on the line (that was last week). How is this little nugget doing? Maybe I should research this company for consideration in my portfolio? Ugh!

Process of Elimination

Taxes are a consideration. No fire sale for me. But I have come to a point where I no longer want to feel the daily pull of checking what amounts to a few percentage points of my portfolio. More (if I should make a good call and win) will not change my lifestyle. Not even a stitch. So why am I spending so much darn time on it? Good question.

I started liquidating the account earlier this summer as I decided to reclaim the time suck the account demands. Remnants will remain into next year. As I downsize the account with a firm rule of adding no new stuff frees more and more of my time. This last week I put a serious dent into the holdings, liquefying them. Which leads to another serious question:




What Will I Do with My Money Now?

Good question. Glad you asked.

Notice I said I would keep my higher-level mad money account. Rather than the games played with the low-level mad money account I only make serious, well-researched, investments in the upper level mad money account. And I plan on adding to those investments over time.

Are you spending too much time of your investment portfolio and real estate? Investment ideas should be automatic and yield high returns. #wealthyaccountant #portfolio #ideas #investment #realestate #beginners #timeAAPL is a serious long-term investment. They are dominant in their market with loads of cash and a cult-like following. At the right price I might add to MO or JNJ. Of course this takes time, too, but I control the time investment. It certainly isn’t a daily routine. TSLA is a great concept company, but also very risky and not destined for my serious money portfolios until the day it holds a position similar to AAPL’s. NFLX is another example with future promise, just not today in a serious money account. FB is on the fence. If FB dropped to 130 I would be very interested. FB’s dominant market position is an advantage. But management missteps have me watching more than buying until they convince me otherwise. Bad management can ruin a good company.

Once upon a time I owned a large real estate portfolio. Today my RE holdings are worth maybe $700k or so. (I’m guessing.) In California that would buy a lot to park your mobile home. In Wisconsin it buys an office building, two residential properties and some farm land. At some point, if the right property in the right place appears, I might slowly rebuild my RE portfolio. Investment properties this time around will be fully automatic with property managers doing all the work while I allocate capital and make major spending decisions only.

And let’s not forget index funds. If I’m allowed to fill a retirement account, I will. The rest can reside in a non-qualified account forcing me to claim dividends on my tax return.

I don’t rule out other alternative investments either, but unless something really trips my trigger I will allocate the smallest of amounts to this area of my portfolio. Maybe a bit more to Peer Street. Maybe.

And if interest rates ever climb I might buy 30-year Treasuries to hold until maturity. It will take 8% or higher yields for me to start allocating something in this area which means this is a distant future event at best.




Smart Investing Decisions

Future investments will not be based on a hunch or some other crazy idea. Yes, I made a killing on TSLA, NFLX and FB. If anyone is paying attention, my lifestyle didn’t change one iota. And since I’m no longer enjoying that part of the game anymore it is time to move on.

Long-term investments require deeper research and more conviction. What is tolerated in a mad money account is not acceptable where serious money is involved. Serious money makes fewer, but larger, investments. That is where I’m at in my life. We had a great run and my interests are changing. I have new things to explore, things I want to do.

If you need a mad money account to keep yourself honest with the serious money then you should keep the mad money around. If you find you have evolved, as I have, then make the change.

There is nothing wrong with change as long as you’re having fun.

 

 

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Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

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QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

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Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you very much!



Keith Taxguy

25 Comments

  1. Kenneth on September 13, 2018 at 9:24 am

    OMG! You owned TSLA! At least you have recently disposed of it. It’s run by a madman, “Considering taking company private at $420 a share. Funding secured.” Followed by (not exactly verbatim) “The only thing left to do is to have a shareholder vote”. These two tweets alone (any other mad tweeters we know?) will cost the company hundreds of millions in share holder and short seller lawsuits, both sides were damaged in the run up and run down afterwards. The man is known to be a drug user, recent picture of him smoking marijuana on a video interview, and that’s not the half of it.

    Mutual funds or ETFs, that’s the ticket, Tesla would only be a very small part of your holdings then..

    • Keith Taxguy on September 13, 2018 at 9:57 am

      Tesla was always a speculative investment, Kenneth. It worked out for me this time, but speculative investments can also sour quickly. IMO Musk is an innovative genius, but his antics of late have soured my opinion of him. Personally, I think he’s cracking under pressure and he is under tremendous pressure. When he started going off the rails I sold all but one share of TSLA. The going private thing was the last straw. I sold my last share as I’m no longer interested in making a future investment there.

      Which brings us to the point of this post. All the time I spend watching these things doesn’t adequately compensate me. I want more free time to pursue other interests so watching all these investments has got to go.

      • Mohammed on September 19, 2018 at 3:58 am

        You write about the mad money account with zeal, perhaps maybe you will start one again?

        I’ve been trending towards Mutual funds but have done really well in a ‘mad money account’ and have held those stocks for years. I’m desperately trying now to accelerate my mutual fund buying to dilute my mad money decisions of yesteryear.

        It’s made me a better investor.

  2. Rounding the Bend on September 13, 2018 at 10:02 am

    My take is that your mad money account is more for entertainment than investing, and that’s OK. It can be fun — just like going to Vegas with $200 in quarters. A good rule of thumb: keep this “account” less than 5% of your assets.

    If you no longer value this form of entertainment, let it go.

    I’ve always enjoyed getting the latest hi-tech gadgets, but it’s not as much fun as it used to be, so I’ve cut back on it.

    • Keith Taxguy on September 13, 2018 at 10:16 am

      I need you as my editor, Rounding the Bend. You chopped 1,500 words off my post with one swing.

  3. Todd on September 13, 2018 at 10:15 am

    I’m surprised you didn’t even mention equity index funds in the section on What Will I Do with My Money Now. Is that because you want to maintain a certain allocation outside of equity index funds?

    • Keith Taxguy on September 13, 2018 at 10:23 am

      Sorry for the confusion, Todd. My index fund investing is 70% S&P 500 and 30% international. It’s not an exact science though. I re-balance infrequently. There is no set allocation of funds outside index funds. My goal is to limit such desires as they tend to take more time. Less is better. If my temperament allowed I’d put 100% in the Vanguard S&P 500 index fund and never look at it again. But I like playing too much. Curiosity killed the cat accountant. I’m out of Prosper and Lending Club for all practical purposes; I let the investment wind down naturally. Peer Street has a small amount only, but I keep thinking I’ll increase the amount slightly in the future.

      Equity index is where most of the money will go. It’s simple with no time commitment required. As I mentioned, if long-dated Treasuries skip to 8% or so I’ll have bonds as a percentage of my portfolio.

      • Todd on September 13, 2018 at 3:32 pm

        Thanks for your reply, Keith! You said you don’t have a set allocation of funds outside of index funds, but do you think it makes sense to target an overall allocation between your 1) index funds, 2) real estate and 3) Treasuries or other bonds? How do you think about that?

  4. Freedom 40 Plan on September 13, 2018 at 10:42 am

    I also have a “mad money” account which is speculative and mostly entertaining. I think (hope) it will continue to be fun in the future, but I can certainly see where it could lose appeal over time. Especially when your other investments require no time and may often outperform.

  5. Mimoza on September 13, 2018 at 2:03 pm

    Keith,
    It sounds like that you don’t follow the usual AA advice that one needs to have fixed income and stocks in their portfolio depending on their risk tolerance, age, yada, yada. It that because you don’t believe in bonds or because you prefer market timing (to make a killing as you say)? What if you were not loaded (say if your NW was $1-2M as an average joe shmoe with a regular job), would you also not follow AA advice that says that 100-120 minus your age should be in bonds?

    Yesterday I looked at my 401k account after perhaps 3 months. I usually check it 2-4 times a year. Fidelity shows Cost Basis and MV in the next column. It wasn’t fun to see a loss on the TIPs vs. nice gains on the stock funds. I didn’t look at my Retirement Income and Balance funds (401k doesn’t offer total bond fund unfortunately).
    This is human greed, no? No, I will not exchange TIPs to stocks. I’m not contributing new money to TIPs either, but I find it so hard to rebalance my AA. One part of the brain says “Yes, I should follow BH’s or the usual financial advice to get back to my AA”, but the other part of the brain (perhaps the stupid one) says “Let the winners run”. The latter sounds like market timing and greed. If I don’t follow the prudent thought process, I’ll perhaps pay the price later, so I’m struggling. If we don’t get bad surprises, I hope the clever side of my brain will win and I will rebalance during the Santa rally…? Oh well…

    • Keith Taxguy on September 13, 2018 at 2:16 pm

      I’m not good at following rules, Mimoza. I want results that outperform the average. I do own 1 Treasury TIPS from years ago. I think I have something like 22 years left on the thing. Just wanted to know how it would play out on a tax return. I check it once a year for taxes only. Thing must be worth $1200 or so by now.

      The reason I focus on equities is because they outperform. Dividends are high enough to fund my lifestyle into the beyond so I have no need or reason to sell in a down market. At this stage of the game I’m willing to hold some bonds if they provide a real return. Somewhere around 7-8% I’ll probably add a few. Over 10% and it will be a growing percentage of my portfolio. (These are all Treasury bonds only.)

      I re-balance my index funds between domestic and international periodically, which isn’t often.

      Reminder: Bonds pay almost nothing now. Stocks in the S&P 500 have an internal return on equity in the mid-teens. The choice is obvious to me.

  6. mike on September 13, 2018 at 8:30 pm

    Hey Keith, love reading your posts ever since we met you at camp mustache few years ago.

    My question is probably something other’s have asked so i apologize if is repetitive but i hope other readers will find some value in it.

    Reading some of the comments, it seems like you are still bullish on investing into index funds – set it and forget it with 70/30 split VTSAX & VTIAX.

    I keep reading within the FI Community that the market is way too high and it will correct but who knows when – no one has a crystal ball. It’s really hard not to time the market and probably harder trying to time it.

    last year, we sold our house and made some money on that sale. I put some of that into CD earning 2.1% and rest is just sitting as cash which i know is not working hard. I am doing dollar cost average each month by putting $3K per month into vanguard (VTSAX 70% and VTIAX 30%) . I just could not pull the trigger in doing lumpsum investment by dropping all or most of the gain from the house sale into index funds. I know timing the market is a fools’ game but yet the fear is “what if the market plummeted next month and it could be a long time waiting….”

    How should someone who is on the sideline dipping toes into index market investments handle their lumpsum/windfall money in this current market conditions? i realize you can’t give our specific financial advise but i really value your feedback and thought process, and i hope others will find some value in that too. thanks buddy

    • Keith Taxguy on September 13, 2018 at 9:25 pm

      Mike, if you bought the S&P 500 index the day before Lehman Brothers failed 10 years ago you would be up >130% from that high today. If for some reason you had the worst timing in the world when you invested your lump sum you still more than doubled your money over the next decade. If you missed the whole decade traveling the jungle or some other off-the-road place you wouldn’t have known about all the hysteria and market gyrations. You’d only have known you had a darn good decade.

      I say that in jest, but I am dead serious in my dialog. Many people read what I publish currently. I’m also very aware the bulk of readers will do so years or even decades after I hit the publish button. For general advice that bridges virtually all economic possibilities (nuclear war would be an example where things might turn out differently) I need to focus on the tried and true. U.S. companies enjoy double digit returns on invested equity. That eventually shows up in the stock price.

      When consulting I frequently tell people to dollar-cost average their lump-sum if they feel the market is too high. (For the record the market is always too high. Since I became an adult in 1982 I heard a never-ending stream of Chicken Little’s screaming the sky was falling.) If you consulted with me a year ago the result was typical; dropping it all in would have been better. And the market was waaaaay over-priced last year. And did you see who we elected?

      Yes, the market will have another meltdown. It’s inevitable. If you’re worried about the market I would sell for a few reasons. First, if I had any debt I’d pay it off with investment proceeds. You can’t lose eliminating debt. Second, you should always have liquid money. This is especially true if you’re retired. Keeping funds in a money market for a rainy day has value as long as the bulk of your funds are in long-term investments. If the market drops you have funds for normal expenses. All you need to do is wait until the market recovers.

      Bears always sound so convincing. Granville (hope I spelled that right) spouted the Elliot Wave Theory in the early 80s claiming the Dow would retest the 1932 lows of the Great Depression. The Dow was 700 and change back then. In hindsight it was a terrible call. The reality is predicting scary market declines sells newsletters. They make absolutely no personal finance sense at all. Ever! Unless the country is going down for good (another constant refrain that never comes to pass), the only choice is to invest now and stay invested through the ups and downs.

      Like everyone else, my portfolio performance was worst when I thought I was smarter than the market. I’ll still buy individual stocks, but only serious investments as I mentioned in the post. If the story changes for the company owned, I’ll respond appropriately. But as always, the broad-based index fund is the only tried and true method that keeps performing over reasonable periods of time. That said, the only responsible course is to drop a lump-sum into the broad-based index fund and walk away. Don’t drive yourself crazy watching daily moves of a schizophrenic marketplace. Life is too short for that.

      • mike on September 15, 2018 at 1:54 pm

        100% agreed – Life is over before you know it. Set it and forget it – i like that simple path. I love how you and JL collins can just distill things down so clearly.

        I have another question that comes from my father in law – he got started really late in the retirement investment game. Currently, age 61 and just started his IRA account and a small taxable account with Edward Jones in late 2016. Total value of $ 70K. He realizes he does not have enough time to amass a sizable next egg being on this path and it was at my recommendation he even opened those brokerage accounts. At least that way, he is saving something versus risking it being spent on stuff.

        My question is he will probably need that money in 7-10 years once he retires. Do you think he should stay vested in the equities market given where things are? he is currently holds 70% stocks, 30% bonds. Or should he just hold something safe like CDs, T-Bills or just cash? I’d hate for him get hit with market correction/crash and have to wait a long time when he is this close to retirement age. We both appreciate your though on this. Thanks Keith

        • Keith Taxguy on September 15, 2018 at 4:01 pm

          A couple of things to consider, Mike. In the next 7-10 years we are virtually certain to see a stomach turning market decline. We are also as certain the market will roughly double in the next 10 years. You could go cash and/or equivalents. That will lock you into ~ 2% or so. I don’t like 30% bonds, but will live with it. If it was me I’d keep the equities. You’re looking out 10 years. What could possibly do better with the S&P 500 experiencing 15% internal returns on equity?

          • mike on September 15, 2018 at 9:14 pm

            set it and forget it 🙂

            Thanks Keith. Looking forward to your next posts.



  7. Mimoza on September 14, 2018 at 9:32 am

    Keith,

    Reading your answer to Mike, you mentioned consulting your clients re investing. When you consult, do you consider the client’s personality, his/her risk profile or do you do it based on your observations of the stock/bond history since 1982?
    The way I read it it seems that you like a bucket strategy but with a more aggressive flavor. I think the conventional advice is to have 1-3 years of expenses in cash followed by the next 4-7 years of expenses in bonds, and then the rest would be in stocks.
    How many years of expenses do you advice to keep in cash or do you measure this as a percentage of retirement portfolio in cash for the bad years?
    Would the rest be invested strictly in stocks (domestic and int’l)?
    How do the mechanics of the bucket strategy work? In case you have an instructional article in existence, please link it.
    Does one need to set for the divvies of stock funds to go to a checking account and also sell a percentage of that stock fund (say 4% if that person follows 4% SWR)? Will he/she continue to do this until the stock market enters the bear and once in the bear market switch to using money from the ‘rainy fund’ and not touch stocks until they rebound? Am I understanding this correct?

    Thanks.

  8. Chris Laska on September 14, 2018 at 12:29 pm

    I’ve always been interested in buying farm land (for hunting and income purposes). Now with the current administrations tariff system impacting many farmers I believe we will shortly see some farms that cannot afford to keep going and will need to sell. A terrible deal for farmers but maybe some potential for me. I struggle with coming up with the right mix of income vs recreation value would be interested to know if you hold your farmland as purely a buy and hold investment, simply recreation or if you are generating income from the property (renting acreage, logging, etc).

  9. Bernard on September 14, 2018 at 5:23 pm

    Keith,
    I’m trying to transition from stocks to Index Funds and ETFs. I have some great winners in the pot (Amazon, Berkshire, Costco), and some horrible losers (Chipotle, 3D Printing, The Container Store). All considered, I’m still slightly ahead of the game, meaning ahead of an Index Fund, but not ahead enough to invest an hour a day on this for the rest of my life.

    I would assume that your mad money account contains winners and losers as well. When you start eliminating, are you willing to sell at a loss or do you hold on for a long time, in case the individual stocks get their day in the sun and sell then?

    • Keith Taxguy on September 15, 2018 at 8:36 am

      If I make a mistake I sell, Bernard. Hope is a poor investing tool. Sometimes the story changes and I sell. Selling an investment isn’t a crime. What you paid for the investment has zero correlation with its current value.

    • Mohammed on September 19, 2018 at 4:13 am

      I’m presuming if the selling was over more than one year, the sequencing of those sales would start with the losers and the tax loss carried over to shield CGT on winners?

  10. Andy on September 14, 2018 at 9:04 pm

    I buy Vanguard Total World Equity Index (VT) in our IRA’s and taxable. I allocate world market cap in the 401k with a BlackRock S&P 500 index and a BlackRock international index. This is simple and I get on with my life.

  11. Mimoza on September 16, 2018 at 6:55 pm

    Keith,

    I like reading this guy, and I thought that his counter advice to your article and comments is interesting. You’re certainly not as rich as those people but still… It’s good to read both sides of reasoning and try to make your own decision:

    http://awealthofcommonsense.com/2018/09/dont-take-asset-allocation-advice-from-billionaires/

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