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One CFP's advice to young, thrill-seeking investors: 'Create a sandbox'

Keep your fun investments contained inside a sandbox so you can make mistakes and not get hurt.

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It's easy to get caught up in all the excitement of putting your money in the market. The daily news cycle and stories we read of amateur traders becoming overnight millionaires tempt us to engage in the money-making fun.

In fact, 61% of those aged 18 to 34 invest for the thrill, according to a survey conducted by Select. It almost seems natural that younger people invest to chase the high that big returns bring.

"When you're younger and the stakes are lower, it's fun to speculate," says Alex Klingelhoeffer, a CFP at Exencial Wealth Advisors. "When I say the stakes are lower, I don't just mean with dollars, I mean with life."

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Younger investors are more likely to have less responsibilities, whether it be managing a home or taking care of a family. They also have time on their side to make up for money they invest poorly.

Experts will agree that it's smarter to invest for the long term rather than seek adventure and, perhaps, instant gratification, but Klingelhoeffer has some advice for young investors inclined to speculate.

The key, he says, is to "create a sandbox."

'Create a sandbox'

What does Klingelhoeffer mean when he says a 'sandbox?' To better visualize his analogy of how investing is like a sandbox, visualize your childhood and remember the times you visited the playground. If there were a sandbox and you went in it, there's a good chance you may have at some point fallen down while playing with other kids.

"It wasn't fun, but at the same time you weren't going to get seriously injured," Klingelhoeffer says. "If you invest for the thrill of it, create a space where you can make mistakes and not get hurt."

In other words, create a sandbox that you can play in or, in this case, invest for fun, without seriously ruining your finances. Putting your money in the market means taking on some form of risk. Keep risky stocks or cryptocurrency investments contained to the sandbox. They should only take up a small percentage of your total investing funds, so that in the case of a stock plummeting, your overall financial picture will still be healthy.

How much of your investing to put inside the sandbox

The money that you use to invest for fun should be no more than 5% to 10% of your overall investment portfolio. But with that, you have free range to do whatever you want inside the sandbox.

"Go crazy," Klingelhoeffer says. "Buy speculative stocks, invest in cryptocurrency, take it to the casino, it doesn't matter. Whatever happens with the sandbox money is fine because all of the important dollars are outside the sandbox, growing to provide financial stability for your family over the long term."

For these reasons, the money in your sandbox should be only money you can afford to lose. When you put your money in individual stocks, the risk is elevated because your money is tied to just one company's performance.

Your sandbox funds can be put into a brokerage account with an easy-to-use mobile app so you can manage your money on the go. Robinhood and Webull are two good options for active investing. They both offer commission-free trading with no minimums required. Investors on the two platforms can even get access to IPO shares, as well as to fractional shares so they don't have to buy an entire share if they want in on a pricey, big-name stock. Plus, they offer tax-advantaged IRAs (traditional, Roth and rollover) so you can manage your retirement funds along with your stocks all in one place.

Klingelhoeffer suggests that the other 90% of your investing money be professionally managed or in an automatic investing service to make it easy. However, you can also do well (and pay less fees) by investing in target date funds offered by companies like Vanguard and Fidelity.

Betterment is a top-rated robo-advisor that invests on your behalf so all you have to worry about is the money in your sandbox. Betterment recommends a stock-and-bond allocation based on your goals and risk tolerance, and it will automatically adjust your portfolio whenever you make a deposit, withdraw funds or change your target allocation. There is no minimum balance required for Betterment Digital Investing, and the annual account fee is a low 0.25% of your fund balance.

Bottom line

The main goal of investing is to grow your wealth over time. If you want to have a bit of fun along the way, you can make riskier investments, just make sure you know the dangers you're taking on when buying individual stocks. Refrain from allocating more than 5% to 10% of your overall portfolio to thrill-seeking investments by creating an investing sandbox. This sandbox can give you space to play around with while also protecting the rest of your finances.

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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