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