Following up to last weeks post about buying Bitcoin, a number of readers got in touch saying that it was just funny money.
Even though I know exactly what they mean I wondered how one could define ‘funny money’. The best explanation I could find was this:
“Funny money is money that is built upon far out assumptions that may never come true. Funny money is money you earn by just doing something you love. Funny money is lucky money.” (From Financial Samurai website)
Bitcoin certainly comes into the first of that explanation. I am hoping it also falls into the third!
However, funny money is found in all manner of investments.
That penny stock that rockets in value or the property that becomes critical to a development project. They have the potential for windfall gains that are not usually sustainable over the long term.
Hopefully we will all be fortunate enough to have a couple of such events in our lifetimes but the key to financial success is turning that ‘funny money’ into real wealth building assets.
Given my background in finance, stocks have always been my favourite wealth building vehicle. By investing in solid companies I get dividends and capital growth over the long term. The price fluctuates but it doesn’t deter me from a consistent accumulation strategy.
However, I am also unable to resist having a punt on some real outsiders in the stock market. This is not a fool proof formula by any means but occasionally it does produce a windfall bounty.
That’s the funny money that needs to be taken off the table and redeployed into more predictable investments. That won’t stop the fluctuations in capital values but it will help prevent some common mistakes by funny money beneficiaries.
You see it’s easy to think a windfall gain is a permanent increase in your net worth. Mentally you bank it and even spend against it. If and when it disappears you are left in a bigger hole than before.
History is littered with paper millionaires who lost it all when the markets (or their business) turned. Highly leveraged investors lost everything when they make the wrong call.
Just think about the dot com boom of 2000. Billionaires were made but few survived the crash because their companies went broke.
That’s why real assets are an excellent store of value. For some that might be real estate or gold or a collectable that gives you pleasure. It could be as simple as having a larger cash buffer for that rainy day.
The value of these assets will still fluctuate but it is highly unlikely they’ll disappear entirely - .unless the world collapses into a new dark age. Even then, houses, gold, silver, food and farmland will always be in demand.
If you are fortunate enough to have a funny money event then make the most of it. Depending on how you handle it, your financial future could change forever.
Cory Bernardi is the author of seven books and has been a member of the Australian rowing team, a publican, an investment portfolio manager and spent nearly 14 years as an Australian Senator.
