(MoneyWatch) One of the most asked questions I get about investing goes something like this: Is it OK to have an entertainment account? My first answer, said with a bit of tongue-in-cheek and help from "Seinfeld," is: "Not that there's anything wrong with that, but if you really need the market to provide you with excitement and entertainment, you should consider getting another life."
On a more serious note, I explain that just as it's perfectly OK to occasionally buy a lottery ticket, and to set aside a small "entertainment account" for an occasional trip to Las Vegas, a local casino or the racetrack, you wouldn't take your retirement account to those places. The reason is you know that you're not likely to win. And the longer you play, the more likely it is that you'll lose. For similar reasons you shouldn't take your retirement account to your friendly neighborhood brokerage.
I then point out that just because you enjoy doing something, doesn't necessarily mean that you are good at it (The vast majority of people believe they are better than average drivers and lovers.) Nor does it mean that the time you spend on the endeavor is the most productive use of that time. The stock market's collective wisdom in setting prices is very difficult competition to overcome -- the market is very efficient -- especially after the expenses of the efforts.
Recognizing this, prudent investors don't attempt to beat the market by trying to exploit mispricings. Instead, they invest in a globally diversified portfolio of passively managed funds, such as index funds. In that way, they earn market returns less low costs, and do so in a tax-efficient manner. And the evidence demonstrates that by doing so they outperform the vast majority of investors over the long run, both institutional and individual.
The bottom line is if you enjoy "playing the market" as much as you enjoy making an occasional bet on your favorite team, playing fantasy football or partaking in an NCAA basketball pool, go ahead and set aside a few percent of your assets in an entertainment account, and enjoy the best of both worlds. Evidence shows you can expect to earn better returns over the long run via passive investing for the vast majority of your portfolio, and you can also play the market while having fun taking the great risk of underperformance with a small fraction of your assets.
In other words, while you're not likely to win, you won't put your retirement in jeopardy either. Some people need to be entertained more than others -- not that there's anything wrong with that. Just make sure your enjoyment doesn't cost you too much in the end.
Image courtesy of Flickr user Tax Credits