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Invest in Index Funds and Gamble a Little

Invest in Index Funds and Gamble a Little Casino Chips Poker Cards

If you listen to Warren Buffett, one of the best and most famous investors in the world you should skip picking stocks and instead invest in a low cost, low fee broadly based index fund.  I’ll take that one step further.  You should also do it yourself without the help of a financial advisor who is going to charge fees.  Keep things simple, invest in index funds.

This simple advice is what I share with friends, family, and readers of my blog and newsletter.  Don’t get fancy, invest in index funds for the long term.  It’s true and that’s what I do with over 90% of my investment portfolio.  I preach and follow my own advice.  Something that is very uncommon in today’s world, especially if you use social media or a Reddit forum.

A little gamble in me

I’m a gambler at heart and not too many years ago you could find me playing poker online and in a brick and mortar casino to the tune of what would most consider full-time job hours.  I would enjoy not only playing poker but also black jack and did everything in my power to stay away from craps for fear of getting addicted to the gamble even more.

My gambling even had me dabbling in sports betting.  Making ridiculous bets with friends about trivial facts.  Placing golf bets against players in my group based on my own skill (I’m not a good golf golfer).  Plus fantasy football, NFL pick’em winners, and probably a whole list of things I’m missing.  I liked to gamble for the entertainment factor, the thrill of beating the house or the expert, and the highs and lows of winning and losing.

I’ve since learned that gambling is not where I should spend my time, energy, and money.  But the gamble is still there.  Rather than spending countless hours at a poker table or risking my money to a game of chance I have chosen to channel my gamble to the rest of my portfolio.

My soapbox disclaimer

Before I go on I want to make something very clear.  In the game of personal finance I am ahead of the game or at the very least on the right path.  Here’s what my financials look like:

  • No personal or mortgage debt
  • Emergency fund that allows me to sleep at night
  • Good retirement nest egg
  • Savings for the fun stuff in life

While investing is exciting and many know the benefits of doing so, just as many people try to “cheat” and invest small amounts of money when they have large amounts of debt, not much money saved, and close to nothing in retirement savings.  Investing a few dollars a month in Acorns is great for the psyche but I propose paying off your credit card would be a better use of your energy and money.

For those reading this and thinking some of this resemble themselves, I would get back to the building blocks of personal finance however unsexy it is and come back after you have laid the groundwork to invest with larger amounts of money not related to your retirement.

The gamble in my portfolio

I have allowed myself to invest up to 10% of my portfolio in individual stocks of my choosing.  If I have a 1 million dollar portfolio I allow myself to accumulate up to $100,000 of individual stocks.  If I want to buy shares of Nike stock (NKE) that’s totally fine, but the value cannot exceed $100,000 if that’s the case one of two things need to happen.  

  1. Increase my investments in index funds
  2. Decrease my investments in individual stocks

I haven’t had that scenario happen as of yet, but my individual stock purchasing is relatively new.  At the time of this writing I’m in the 6-7 percent range.

Does my individual stock gamble move the needle?

So it’s incredibly important to point out the fact that these individual stocks don’t move the needle as much as one would think. 

Example:

  • If my index funds are $900,000 and go up 10% for the year this would leave me with a total of $990,000.  Pretty great right.
  • Then let’s say my $100,000 in individual stocks crashed and burned losing 50% and moved all the way down to $50,000.  Total bummer.
  • But how did I do for the year? Well my 1 million is now $1,040,000 which is an overall gain of 4%.  

Not bad considering I lost half of my money picking individual stocks.  If I had invested in only index funds in this scenario I would have gained a total of $100,000 or $60,000 better than the gains in this scenario.  So while I lost 50% of my individual stock portfolio and $50,000 in this scenario I actually gained $40,000 or 4% for the year. 

An unlikely scenario

It’s important to note that this scenario is pretty unlikely as the index fund and individual stocks as I will discuss later are most likely currently in my portfolio already.  This would cause a pretty close correlation to the actual return of the index fund.  Unless for some reason this stock wasn’t present in any of my index funds or if the entire $100,000 was distributed in 1 or 2 stocks.  

There are certainly worse scenarios that could happen like the index fund losing 20% and my individual stocks losing 40%, a total loss of 22% ($720,000+$60,000).  there are also best case scenarios like index funds increasing by 10% and the individual stocks increasing by 30% for a total gain of $120,000 or 12%.  

Goals and Measurements

My goal with investing in individual stocks is pretty simple.

  • Have fun
  • Beat the S & P by 2% every year
  • Never lose money, haha
Invest in Index Funds

2020 Returns courtesy of Personal Capital

Last year I was able to beat the S&P 500 by more than 2% and even the US Stock market by that amount as well which surprised me a little.  Interestingly enough our Vanguard account which houses the majority of our taxable brokerage portfolio was right at 19% for 2020.  Although to be fair this account has a mix of stock and bond index funds (CPAs and tax professionals are probably cursing my name because of my bonds being held in a taxable account).

Individual Stocks + More of Your Favorites

Since over 90% of my portfolio is made up of index funds like Vanguard’s VOO,VTSAX, and VUG.  I tend to have a pretty large portion of my portfolio in the biggest companies on the planet:

  • Apple
  • Microsoft
  • Amazon
  • Google
  • Facebook

When I then decide to buy more of Nike stock (NKE) for example I’m really just increasing my Nike holdings in that particular index fund.  Based on the most recent portfolio holdings, Nike makes up 0.53% of the overall portfolio of Vanguard 500 Index Fund ETF (VOO), then I am simply choosing to increase the percentage.  I’ll use an example to illustrate.  

Making small bets

If 25% of my portfolio is made up of VOO and I have a 1 million dollar portfolio then I would own $250,000 of VOO.  Since VOO owns 0.53% of Nike stock then I would own NKE to the amount of $1,325.  If none of the other index funds of my remaining $750,000 owned any Nike stock that would mean I would have an even smaller percentage owned.  

More than likely the percentages are about the same with VTSAX and VUG so of my 1 million dollar portfolio I would own 0.53% or $5,300.

Buying more shares of Nike stock isn’t really as much purchasing individual stocks, but rather increasing the amount of Nike I hold in my portfolio compared to the other 500-3640 stocks that make up my portfolio.  What I have decided to do is increase my allocation in some of my favorite stocks like recent Nike (NKE) for example. 

Using the same numbers from above if I decided to buy $10,000 worth of NKE in addition to my index fund investment in VOO then my overall portfolio allocation to Nike would be $15,300 or 1.53% of my 1 million dollar portfolio.  Not a huge change in allocation but definitely an increase.  I’m not really trying to hit a home run with my Nike stock purchase.  Instead I’m placing a small bet that Nike will perform better than the majority of stocks in the index fund.

Right between Tesla and Berkshire

As of this writing the VOO allocation ranking in terms of allocation amount to Nike currently has a 39th place ranking or 0.53%.  If however we used the example from above and increased the allocation to 1.53% this would change the rankings.  Nike would instead be wedged between Tesla at 1.97% and Berkshire Hathaway at 1.39% and have a 7th place allocation ranking.  Of course this is all subject to change based on the market, share value, etc. 

Quick Summary

Investing in individual stocks can be outright dangerous.  Consider the ups and downs of the market let alone one company.  Possibly riding momentum plays rather than fundamentals of a company.  Even searching for the stock or crypto currency that’s going to cure years of not investing or the fear of missing out (FOMO).

Personally I invest in index funds.  However for me it’s an exciting adventure into owning individual companies and really placing small investments on companies I believe in and follow.  But the end result is I invest in index funds for over 90% of my portfolio and place small bets on increasing the allocation in certain companies with individual stock purchases.

Do you invest in individual stocks?   Do you invest in index funds?

  • TPM says:

    I think this is a great approach and one I do as well. About 50% of our equity exposure is in index funds and bonds and 50% I invest in individual securities.

    For what it is worth, I don’t think investing in Nike or Google is akin to gambling, those are wonderful businesses.

    Just one observation/question, since your index fund already has a high allocation to FANG and Microsoft (probably around 20%), why allocate more in those companies vs companies out of the S&P?

    Great job on beating the market!

    • Funny I was just reading your “birth dividends” article before I saw this. Love that concept by the way.

      Valid point on the FAANG stocks, however I look at it from purely a what companies are “my favorite” (there’s a lot to that statement). So I just happen to think Google rules the world. I use and like Google for almost everything. Also it fits a bunch of other criteria.

      I guess in the end it’s not much about diversification or contrarian investments to the S&P as much as it is concentration and preference. At least for my top 3, I do have small positions in non-S&P 500 stocks. In the end it’s Google>FAAN

  • Bobby says:

    I like your choices. I have the 3 fund portfolio.. Total Stock Market, Total Bond Market, VTIP. Easy as pie.

    • Simple is often best. I’m curious if 20 years down the road I’m not wishing I kept it even more simplified like you Bobby👍

  • Most people can follow a core and explore investing strategy. Invest the great majority in core safe investments and use a small amount to explore.

    • I’m not sure I would agree that most people can follow a core and explore investing strategy. I think most people invested in individual stocks should follow this strategy though.

  • Yes, I’ve started to do this as well. Largely because I am already sitting on 100+ individual stocks (from my former FA) that I can’t divest due to capital gains, so I would rather increase my exposure to stocks that I like in the long term. And as I can rid myself of any other individual stocks I will!

  • Martdoc says:

    I am gambling a bit more than you are, I allow up to 20% in individual stocks that I manage, the majority of the rest are in index funds. While I still maintain a mortgage on our primary home (renting it out, military family stationed elsewhere right now), we have reached FI. Over half the value of the individual stocks is Apple that I bought during the dot com bust, which has had a lot of growth since then. Borrowing from POF playbook, my plan is to move a large chunk of Apple into DAF, avoid the capital gain taxes, have a fund to donate from during retirement, while greatly limiting my risk from holding so much of one stock.

    • Making moves from a position of strength is always preferred. Assuming the Apple stock is not part of the FI numbers moving it to a DAF could absolutely makes sense depending on your values and goals of course.

  • Steve says:

    I just buy the top 10 holdings of the indexes and cherry pick the rest (aka nike and others). Keep in mind most of the indexes are tech heavy in the weightings. I balance out with equal weighted ETF’s as well

    • So basically building your own weighted index fund. I don’t think that’s too far off from what buying individual stocks within the major indexes is doing. I wonder the track record over time for you or this type of move?

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