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Tips for investors who insist on experimenting with ‘fun money’

Decide how much you’re prepared to lose, and set strict limits for gains and losses, experts advise


Date: April 20, 2016

While most investors know that making a fortune off Wall Street is highly unlikely, they still like to dabble. Some do so using a separate pot of “fun money” that is not part of their regular portfolio.

Even if they are experimenting with just a small percentage of their overall holdings, however, financial experts say investors should be careful.

Scotia Wealth Management associate director and senior wealth advisor Bev Moir says that most of her clients are five to 15 years away from retirement and thus not inclined to fool around with the wealth they’ve accumulated. In some cases, it’s because they’ve learned about saving for retirement the hard way.

“They’ve been there, done that – lost money or had bad experiences early in their life,” she says. “If somebody says to me ‘I want to play,’ I tell them, ‘I don’t play.’ I do not like losing money for my clients.”

When clients are determined to play the market with a portion of their portfolio, Ms. Moir refers them to a direct investing website and suggests they determine in advance an amount of money they wouldn’t mind kissing goodbye. It could be a simple lump sum or a percentage of their total net worth or investable assets.

“For some people, [wanting to play the market] might be a part of their emotional makeup,” she notes.

One client, a retired widow, for instance, wanted to take her chances, putting $10,000 into a discount brokerage account.

“That was all she was prepared to lose. It turns out it’s down substantially in value,” Ms. Moir says. “I’m not surprised. It happens to be in the energy sector, but it could have been tech stocks or anything else. It’s not going to have any impact on her overall portfolio return or net worth.”

Ms. Moir suggests that these investors set limits on a stock’s performance – losses as well as gains.

“Decide how much you’re prepared to lose,” she explains. “Have that decided in advance on the downside as well as the upside.”

She recalls a client years ago who, before hiring her, had put money into Bre-X. She knew its early trajectory wasn’t sustainable and suggested he get out, but he dug in his heels and refused.

“We all know where that sad tale ended,” she says. The company’s shares tanked after fraud was discovered.

“That’s where guidelines on the upside come in. You could make a lot of money, but think about: At what point would you take some profits? Even if somebody doubled their money, they might take the original amount out and leave the gain behind, then it doesn’t matter because you got out with the original principal and anything beyond that is gravy.”

Investors going it alone should use an unregistered account, not an RRSP or TFSA, she says, since a capital loss can be written off against capital gains, which “helps ease the pain a little bit.”

Ludovic Siouffi, an investment and insurance advisor with Canaccord Genuity Wealth Management in Vancouver, says that clients who want to play the market typically use either a direct investing account or a separate broker who specializes in what he calls “higher alpha investment.” Some clients opt for private equity deals in holding companies.

For those who are adamant about going it alone, Mr. Siouffi suggests they be as diversified as they can.

“If we’re focusing on blue chip dividends and stocks [in our primary portfolio] and you want to go have some fun in penny stocks in the mining space, we won’t have any exposure to that space, so go and have some fun there. Try to stay with or look at ideas or opportunities outside of the scope of what we’re investing in.”

More often than not, Mr. Siouffi says, clients give it up once things start going poorly.

“A lot of people who are just starting investing haven’t been through 2008, or if they have, they were lucky enough to have held on or signed onto a broker. A lot of emotion and panic kicked in. People were saying, ‘What’s going on? or ‘What am I doing?’ By the time they found out, their portfolios were down 30 per cent.

“I can preach all day about an earthquake in Vancouver,” he says, “but until it actually happens, nobody’s prepared.”

Being prepared for the future is exactly what Adrian Spitters, senior wealth advisor at Assante Capital Management Ltd. in Abbotsford, B.C., has clients focus on.

He advises clients to pay off any debt before contemplating playing the market. And instead of shaving off a portion of a portfolio to essentially gamble with, Mr. Spitters urges investors to have a complete financial plan in place.

“They may have some extra cash in the bank and think ‘I’m fine,’” says Mr. Spitters, author of How to Sell Your Farm Successfully or Transfer it to the Next Generation. “Are you already on track to reaching your minimum [retirement] goals?”

If they can confidently answer yes, then Mr. Spitters suggests any high-risk investments be placed in a tax-free savings account. “You want maximum growth and maximum return, tax-free,” he says. “I would encourage them to top up their TFSAs with the most aggressive part of their portfolio, then they can be more conservative with the rest.”

However, he says most stock tips simply don’t pan out.

“If you’re going to gamble, understand that emerging markets are extremely volatile,” Mr. Spitters says. “If you understand that it can be three or four years or more before it comes back, and you’re comfortable with that, put it in a TFSA and don’t look at it.

“So far,” he says, “I have yet to have a client who’s come to me with a winner.”

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