At some point, you'll probably be tempted to chuck all the sensible investing advice you've heard out the window and bet on a hot stock with questionable prospects. Are you made of stone?
Go ahead and take that flier, says Morningstar, but create a "mad money" account—and limit its size. This way, you won't jeopardize any long-term financial goals:
When you eat dessert, it's best to keep your portion modest. Similarly, if you must take a gamble on the market, your speculative bets, in aggregate, should compose a small portion of your overall portfolio (10% or less). Also, you should consider keeping your speculative holdings separate from your long-term investments in an entirely different account. Avoid commingling them. That will keep you from threatening the health of your nest egg. (It's worth noting, though, that keeping separate accounts will give you more paperwork to deal with than if you kept all of your investments in a single account.)
As with gambling, it's a good idea to go in with an idea of how much you're allowed to lose. On the flip side, says Morningstar, "If you start making money, resist the temptation to add more money to the account. Remember that hitting the jackpot once doesn't make it any more likely you'll hit it again."
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karthik kumar 10:02AM June 25, 2008