In 1984, an ice cream truck driver appeared on the show Press Your Luck and proceeded to win $110,237 in cash and prizes.
For those too young to remember the show, contestants answered questions to win “spins.” For a spin, lights would flash around a board and the contestant would hit a button to stop it. Land on a prize, you can stop or keep going for more. Land on a “whammy,” a red little monster, and you'd lose everything that spin. Hence, press your luck.This ice cream truck driver kept winning. And winning. And winning. To the disbelief of, basically, everyone who was watching, including the host.
As you can imagine, winning $110,237 in 1984 was a big deal. That's nearly a quarter million dollars today.
Was America seeing the luckiest man in the world?
No, Michael Larson figured out there were only five patterns of flashing lights. He would study them, with his VCR, and when he got on the show… his good luck was actually good preparation.
Roman statesman Seneca the Younger once said, “Luck is the matter of preparation meeting opportunity.”
How many times in your life have you seen an opportunity and realized you were not in a position to take advantage?
It's tough. While we don't feel missed gains as painfully as we feel losses (known as loss aversion, first studied by Amos Tversky and Daniel Kahneman), it still hurts.
But there's a way you can prepare yourself to take advantage of your good fortune.
We all know about saving for an emergency fund.
(and we all know about the next biggest saving goal – retirement)
What if your finances are strong and you've taken care of those… what next?
If we save for inevitable but unpredictable bad events, can we also save for inevitable but unpredictable good events?
An opportunity fund is a slug of money you've set aside to put towards … well, opportunities.
Why You Need an Opportunity Fund
There are different kinds of opportunities:
- A business or real estate investment, where you expect a return,
- A loan or similar debt instrument, where you expect a return,
- A loan to a friend or family member, where you don't expect a return,
- A great deal on something you already had your eye on,
- A donation to a worthy cause,
- The list is endless…
I separate them into three major categories – investments, purchases, and donations.
As you get older, you'll see a lot more investment opportunities come your way. As your personal and professional network expands, you'll talk to more people who might be starting a business or getting involved with an investment.
If you are tempted by an investment, you want to have money set aside to take advantage of it. You don't want to dip into your retirement nest egg or risk your emergency fund. You want money set aside specifically for risky investments.
If it's a private investment, where do these opportunities fit in your overall portfolio? I put them in the riskiest asset class. I don't let it be more than 5% of all of my investments (it's really less than 2%). They are illiquid, impossible to value, and really really risky – not my ideal investment mix. 🙂
They aren't always private or risky. What if a stock you've had your eye on suddenly dropped 10% but still had strong fundamentals? A lot of blue chip stocks fell in the Great Recession and you could get stocks like GE in the spring of 2009 at just $7 a share and a 3.3% yield (GE now trades in the mid-20s). If you wanted to build a dividend portfolio, that was a great opportunity.
Right before my lovely wife started her doctorate, we treated ourselves to a vacation to Europe. One of our first stops was to visit our college friends living in England. They would join us as we went to Ireland and they'd catch a U2 concert in Croke Park.
Originally, we weren't going to the concert. We were going to a nearby pub because we like U2 but not enough to want to spend a few hundred dollars to see them.
That was, until, two of our friends had a mix-up on their RyanAir flight and didn't make it to Ireland in time to attend.
It was awful because of the six of us, they were the biggest U2 fans. They were the ones who were on the email list to get early tickets in the first place.
Through almost no fault of their own, they never made it onto their flight and the next one would cost them thousands of dollars. So they couldn't make the show. 🙁
We offered to buy their tickets and we felt (financially) comfortable doing it because of the opportunity fund. We didn't budget for it in our trip's budget but we wanted to help our friends out by taking this one small thing off their mind, we knew we would have a great time, and we had the cash available to do it.
U2 is incredible in person too. Highly recommended even to a casual fan. (here are a series of videos from that show)
Another example of an unexpected purchase is a sale on an item you're planning on buying. In my Upgrade & Save Strategy article, I talk about how you can make investments into what you buy to increase enjoyment, lifespan, and other features. If you have a list of items you plan on upgrading, one may come on sale before you planned on buying it. An opportunity fund makes it possible for you to take advantage right now, rather than waiting and missing out on the sale.
The opportunity fund can also be used for anything that is important to you. It's not necessarily an investment where you need a return or a great deal on something you needed.
If you have a friend or family member in a jam and they need money, you can help. You don't want to put yourself in a difficult position to help someone out, so having an opportunity fund is key for this.
How to Build Your Opportunity Fund
Much like an emergency fund, you need to figure out an amount and where you'll store it.
In picking the amount, I like to keep it at half the size of my typical investment size. If your typical investment is $1,000 — then keep a $500 opportunity fund. I find that the biggest opportunities are financial, so I let that be the tent pole.
As for where I keep it, I keep mine in a high yield fund. In this case, that's the Vanguard High-Yield Tax-Exempt Fund (VWAHX) where it yields 2.81% and pays an expense ratio of 0.20%. I like it because it keeps the amount relatively stable, I get a dividend, and the fee is low. There's an Admiral Shares version that has an expense ratio of 0.12% (the minimum there is $10,000).
It's as simple as that!
If you've managed to contribute as much as you care to into an emergency fund and your other savings goals, consider building an opportunity fund.
Do you have an opportunity fund? What are you thinking about using it on?