The Problem With Core And Explore
A core and explore investing approach can give you a taste of both passive and active strategies. The idea being that you put 90 percent of your portfolio into a low-cost, broadly diversified set of index funds or ETFs, and then put the remaining 10 percent of your portfolio into investments that have potential to beat the market (individual stocks, or actively managed mutual funds and ETFs).
But if you’ve already wisely put 90 percent of your portfolio into index funds, it probably means you accept the idea that beating the market is difficult and so the best way to maximize your investment returns is by passively tracking the market and keeping costs low.
Many investors – especially index investors – obsess over fees, looking for ways to shave tenths or even hundredths of a percent from their mutual fund or ETF expenses. But some investors are willing to throw away the benefits of a well-diversified investment strategy by trying (and failing) to hit a home run picking junior mining stocks on the Venture Exchange.
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.
Core and Explore
The problem with core and explore 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?
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).
Related: Borrowing to invest – What the experts have to say
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 not an investing expert. I don’t care if he says he’s day-trading his way to an early retirement. Why are you listening to him?
Final thoughts
Is your core and explore approach adding value to your portfolio, or costing you money?
I get it – it can be fun to try and find the next Microsoft, Google, or Amazon 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 “stock tip” stories end up as cautionary tales for investors. So why do we keep doing it?
Related: How the behaviour gap affects investor returns
Remember, you don’t need to swing for the fences when a base-hit will do just fine.
“I get it – it can be fun to try and find the next Microsoft, Google, or Amazon from a list of up-and-comers. But the odds of that happening are overwhelmingly not in your favour.”
.. so therefore never do anything fun that takes money away from the retirement account?
You are just framing it wrong.
It’s not, 90% in index funds and 10% in risky investments.
It’s 100% in index funds, and a hobby with the potential for a payout.
As long as there are limits, I don’t see anything wrong with it.
For me, it’s $1000 in the fun account Jan 1st. Dec 31, money goes in or out of the account. Jan 1st there is only $1000. Money does not get topped up throughout the year, if I lose it I lose it.
This article was framed poorly and makes a lot of assumptions.
There is absolutely nothing wrong with the approach. If the retirement plan is on target and the “explore” portion of the account is accounted for in said projection then go nuts. Some people enjoy investing as a hobby, or gambling on a speculative stock. If they can afford it then who cares.
This article also assumes that the explore portion of the account is being used on speculative mining and O&G stocks or “penny stocks”. That is not necessarily, and probably usually is not the case. Maybe the are speculating on Amazon, Tesla, Google or crypto. If they did, their returns were enhanced (potentially significantly).
If it is affordable, the individual enjoys it and they understand the risks then who cares.
Guy, I disagree. If you already know that indexing gives you the best shot at the optimal outcome, it’s not rational to then go and put 10% of your retirement accounts in something that you know will not give you the best shot at the optimal outcome.
If you want to take some of your money (most say no more than 5% of your financial assets) for play money, that’s fine, but that is not part of your retirement account.
Investing is supposed to be boring. If you are looking for excitement from your retirement accounts, you should find a less expensive form of entertainment.
Both aB and Guy are bang on. This column is an argument in semantics: should the 10% be part of the core, are you ‘stealing’ from the core to explore? If the so-called 90% is actually sufficient or on target for your retirement goals, then you could consider the 10% your separate, high-risk investment account. aB’s advice to never top up this account, to limit what you will risk, is wise and essential, of course.
I have a separate travel account. I could do better in retirement if those funds went into my retirement account. Instead, that 5 or 10% of my savings will generate a minuscule return until the time each year when I spend it all. Having a high-risk investment account that, presumably, brings you some pleasure, is no different, except that you have a small chance of retaining your capital and actually increasing it. And, as Guy notes, your ‘risk’ could be buying Microsoft when it’s languishing around $45 or buying Apple when it dipped to $90 or taking a chance on the rocketship Shopify at $67. I looked at all those investments at the time and only went for the Apple but, perhaps, a high-risk account would have allowed me to ignore the voice in my head that said, Surely, Shopify can’t go any higher.
Andrew Hallam, aka The Millionaire Teacher included a rule about stock picking in the first edition of his book:
Rule #9: The 10% stock picking solution…if you really can’t help yourself – When buying individual stocks, do it intelligently. You’re not likely to beat the indexes over the long term, but you’re sure to have the odd lucky streak, and you might really enjoy the process.
He removed this ‘rule’ in the second edition of his book, likely because of the mixed message and that few people can actually stick to their rule (aB – you’re likely one of the few exceptions!).
My frame of mind when writing this article was centred around younger investors who have bought into the couch potato indexing approach and on one hand talk about lowering their MER by minuscule amounts (switching from VXC to XAW, for example), and then on the other hand talk about taking a portion of their portfolio to bet on individual stocks (medical marijuana stocks, in this case).
As Jeff said, it was written for those who are stealing from their core to explore, not for those who have rules or save a bit extra to make fun trades and swing for the fences.