March 10

Dear Reader,

This blog is for beginning investors who are looking for a simple, effective way to invest.  As I’ve said repeatedly, one simple way is to buy index funds or index ETFs.

However, for many different reasons, some investors may want to hold a few individual stocks.

That’s the topic for today: a financial sandbox, a place to have individual stocks and to learn about them and the market.

The Big Picture

Sandboxes that I remember as a youngster were simple wooden-sided boxes filled with sand.  They were fun places to play. I still see sandboxes from time-to-time although many are much more elaborate than when I was a child.

The idea of a sandbox is a place to play and learn in a relatively risk-free environment.

Some adult sandboxes in the area of government, technology, and/or finance include:

• Regulatory sandboxes: mechanisms for developing regulations that keeps up with the fast pace of innovation.
• Product sandboxes: isolated testing environments that enable users to run programs or execute files without affecting the application, system or platform on which they run. Software developers use sandboxes to test new programming code.
• Disclosure sandboxes: mechanisms for companies to test new ways to inform consumers

One government agency, the Bureau of Consumer Financial Protection (BCFP) /Consumer Financial Protection Bureau (CFPB) is one of the key agencies in developing policies related to such sandboxes.

Another adult sandbox–and I realize it’s stretching the name–is a very artistic type of sandbox: the Japanese rock garden, with a base of gravel or sand.  These beautiful enclosed spaces have a few carefully chosen rock formations or sometimes pieces of sculpture. Often the sand is swept into intricate curves and lines.  The garden may change over time as the gardener thinks about his work and learns what is most pleasing and satisfying.

Some quotes about sandboxes are;

That’s important to remember: it’s not just a collection of great individuals but a group of people who enjoy playing in the sandbox, thoroughly enjoying collaborative problem solving.  

Warren G. Bennis

An employer is good only for providing the sandbox in which to play. If there is no challenge or if resources fail to be provided, the engineer will seek employment elsewhere.

Edgar Schein

 

I long ago abandoned myself to a blind lust for the written word. Literature is my sandbox. In it I play, build my forts and castles, spend glorious time.   

Rabih Alameddine

A Story

I started my investing with a few stocks. They have done well for me and I like the companies they represent. For example, I like Costco.

When I started using index funds, I sold some stocks that no longer felt right for me, but kept others.

Having a portfolio primarily of index funds, with a small number of stocks I like and/or am learning about is fine for me.

This small number of stocks is my investment sandbox. Everything is held by Vanguard, with no special labeling of the account.  Only I know what’s in my sandbox.

Today’s Topic: Sandbox

Over 10 years ago, Jason Zweig wrote a book, Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich.  In an interview about the book, posted on www.etf.com1¹ he said:

Increasingly, my advice for individuals and for financial advisors who serve them is that everybody should have two things: a lockbox and a sandbox. The lockbox has something like 90 percent of your money in index funds and nothing else. The sandbox, where you have maybe 5 percent or 10 percent of your money, is where, if you really want to, you can play a little. There’s nothing terribly wrong with getting entertainment out of investing, as long as you understand that’s what you’re doing, and as long as you don’t do it with all of your money.

 

So, if investors have individual stocks, bought some time ago, or inherited from relatives, or will purchase individual stocks in the future simply to experiment and learn, Mr. Zweig advises on allocating only a small percentage of a total portfolio to such stocks.

In some cases of investors I’ve known, they’ve sold all their individual stocks (after considering tax implications of capital gains) and went 100% into index funds.  Other investors have kept these stocks both for sentimental reasons and because they are good values.

It’s an individual choice, but for those committed to index funds the amount in individual stocks is relatively small.  That’s their sandbox. They learn from their choices.

One colleague has most of her funds with a financial advisor but she keeps a small account that she manages with stocks of particular interest to her.  Recently, she told me she has not yet beat her financial advisor on  total returns, but she enjoys using her sandbox to learn more about the market.

Thinking about having money in a sandbox requires the same kind of thinking about goals, risks, and returns as any other investment in the market.

In writing this topic, I’m neither advocating for a sandbox nor advocating any investor sell any or all individual stock holdings. Each case is different.

Simply, this is another idea on how people invest.

Important Idea

♦  After allocating most of a portfolio to index funds, some people keep a little money in a ‘sandbox’ of individual stocks that they particularly value and that they use to learn more about investing.

*****

Now, I need to do some washing and to clean out my closets of old clothes: good for spring cleaning and simplifying my life.  Wish you were here.

References

1  https://www.etf.com/publications/journalofindexes/joi-articles/4225-an-interview-with-jason-zweig.html?nopaging=1