The role of a fun (explore) portfolio and a lesson in humility

We emphasize in our blogs that, over the long term, a properly selected U.S. index Exchange-Traded Fund (ETF), one that tracks the S & P 500, held in tax-advantaged accounts, has been the investor’s best way for growing savings and is likely to remain so for many years. To repeat, the habits which investors need to achieve these results, the rules, if you will, are:

1. Having an early, disciplined savings program
2. Self-directed (do-it-yourself) investing
3. Buying the entire US market (not picking stocks)
4. Buying and holding (not timing markets)
5. Buying low, selling high (adhering to a personal asset allocation regime) and
6. Avoiding complexity.

We also referred to “core” and “explore” portfolios. The explore portfolio is really a fun portfolio in which Monday Morning Millionaire Program members can try to beat the S&P 500. A fun portfolio is a realistic testing ground. Many dummy portfolios, mock portfolios, paper portfolios etc. are available on the Internet but nothing equals the realism of having hard-earned money on the line. Only money which we can afford to lose should go into a fun portfolio. It is not the place for our retirement fund or money which we are saving for our children’s or grand children’s education or money which we are saving to buy a home. Many serious investors don’t bother to have one.

The most significant experience that a fun portfolio can contribute to our saving and investing is to teach us what not to do. After all, in order to beat the market, that is, to beat the S&P 500, we need to break the rules. Breaking the rules intelligently and with some luck we can beat the market and do so for an extended period. Sooner or later, however, we will likely underperform.

By writing (selling) covered calls and cash-secured uncovered puts, my fun portfolio outperformed the S&P 500 for more than six years. Then came the reckoning!