Investor Alert

Sept. 2, 2003, 12:01 a.m. EDT

If Itching to Invest, Consider A 'Mad Money' Account

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By Ian McDonald

We all have to grapple with our inner gambler from time to time.

As stocks show a pulse, some of us are likely getting the itch to make an outsized bet on one tantalizing sector or another. The good news is, you can give in to these urges without sabotaging your portfolio.

Even Benjamin Graham, the sober father of value investing, advised enterprising investors to open a small "mad money" account aside from their portfolio strictly to exercise their speculative demons, in his seminal book "The Intelligent Investor."

"Speculating can be fascinating and it can be a lot of fun," Mr. Graham wrote in the 1973 edition. "If you want to try your luck at it, put aside a portion -- the smaller the better -- of your capital in a separate fund for this purpose."

Mr. Graham's reasoning: Rather than try to squelch the temptation to invest in what seems like a can't-miss stock or sliver of the market, act on it in a sensible way. In fact, indulging yourself in a small side account can help you be disciplined, if boring, with the bulk of your money.

Let's map out three rules for a "mad money" account and then mull some mad investment ideas.

1. Don't bet the farm.

Conventional wisdom says your mad money account should never add up to more than about 5% of your overall portfolio. The idea is that you shouldn't invest much more than you'd take to a casino if you were so inclined. How do you know if you've invested too much in your mad money account? Imagine losing it all and ask yourself if it would affect your lifestyle and psyche.

Test Your Knowledge Which type of mutual funds have taken in the most money this year, according to the Investment Company Institute? A. balanced funds B. money market funds C. stock funds D. bond funds See answer below.

2. Use a separate, taxable account.

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