Entrepreneurs can drive their financial planners nuts. First, they pay their planner good money to set up goals, create a financial strategy, allocate assets, and keep abreast of events -- all very logical and sensible. And when that's done, they take back a big chunk of their assets to use as "mad money," which they fritter it away on fly-by-night stocks and the hot mutual fund of the day.

Fact is, the urge to splurge on hot tips is nearly universal among small-business owners, and the results are nearly universally bad, says one financial planner. "We find they bet on startup companies, penny stocks, and tips from brothers-in-law," says Ronald W. Rogé, a planner in Bohemia, N.Y., whose roster includes plenty of small-business clients. Rogé frowns on play money and pressures his clients to invest as little as possible this way because, he says, "this money is gone. From our experience, it dwindles down to nothing after a while."

Why do entrepreneurs do it? Perhaps it stems from their hands-on nature. Perhaps it's their natural penchant for risk. Or maybe it's because they are results-oriented and their regular investments seem to play out at a glacial pace. "They're used to making decisions quickly," says Kathy Jones-Price, a planner with American Express Financial Advisors in Salt Lake City, Utah. Whatever the reasons, her clients often set up trading accounts holding a portion of their assets where they can call their own shots.

Skip Bellock, for example, is willing to let Jones-Price handle his serious money, but he holds back one-fifth to invest himself. He enjoys reading about investing and spends time tinkering with his accounts. "Our mad money is in more aggressive stuff" than blue-chip stocks and mutual funds, says Bellock, the owner of Wasatch Construction Services, a $6 million home-remodeling business in suburban Sandy, Utah. He and his wife have invested mostly in foreign-stock mutual funds -- "and, regrettably, some emerging markets," he laments.

Actually, Bellock's approach is pretty responsible by most standards. His business is purely domestic, so foreign equities are an excellent counterbalance. His returns have trailed those of his core portfolio this year, but long term they have been similar. And although his funds are riskier than blue-chip portfolios, they are much more conservative than the kind of wild schemes that often catch entrepreneurs' eyes.

Still, if such behavior is truly endemic to entrepreneurs -- if it's more likely to happen than not -- then it is something that can be included in your financial plan. To be sure, your planner may cringe at the thought. But if this is how you are going to conduct your investments, it's better that he or she knows it in advance. It is not necessary to endorse recklessness in order to plan for it.

BALANCING ACT. It may be possible to temper your penchant for risk by putting a cap on your mad money so that it can never wreck your core portfolio. In fact, it might even contribute to the overall plan if you aim your self-directed investments toward sectors that provide balance and diversity for your assets.

If this is going to work, make sure your core portfolio is carefully put together so that it can withstand any mistakes that you make with your mad money. In addition, a solid financial plan will tell you how much capital you need to keep safely invested for emergency expenses, the kids' tuition, retirement planning, and other predictable costs that you simply have to cover. Until you've done that, play money should be out of the question.

If there's any surplus left after that, how much can you play with? It depends on your skill and your tolerance for risk. Jones-Price says some of her clients earmark up to 20% of their overall assets. "If a client wants to do this, then I encourage them to do this for two reasons," she says. "I think it helps them learn more about investments in general, and I think it provides them with a higher level of understanding of the work I do with them.… If they're serious about it, I don't have a problem at all."

But 20% could be far too steep for a less-savvy investor. You have to ask yourself what would happen to your personal wealth if you lost all your mad money during a year when weak financial markets also clobbered the rest of your portfolio. Rogé cautions clients to play with no more than 10% of their investment capital. "You pretty much know what's going to happen to that money," he says, with a fatalism that belies his experience.

If you don't want your picks to meet the same sorry end, make a few adjustments. Stick to established companies and marketplaces so that you don't face undue securities risk. And whenever possible, invest in areas that bring something fresh to the table. You don't want to duplicate your core investments. You want to augment and enhance them by seeking out industries and regions that are underrepresented in most broad-based mutual funds. Some examples:

Foreign mutual funds. Funds that invest strictly in foreign companies react to a host of events and risks unique to those far-off locales and, therefore, don't tend to trade in unison with American stocks. In 1993, for example, when Standard & Poor's 500 Index advanced only 10.06%, Morgan Stanley's index of stocks covering Europe, Asia, and the Far East surged 32.56%. The flip side, of course, is a year like 1998, when nearly every foreign market has been mauled while broad U.S. indexes are showing solid gains.

The hard part is finding a suitable mutual fund. For starters, relatively few funds have records of five years or more with the same manager in place who has seen crises come and go. And, given the recent market turmoil, the returns are not likely to seem so stellar when compared with domestic funds. But a few stand out in spite of it all. Some candidates, culled by Morningstar Inc. of Chicago: GAM International, up 17.10% in that period; BT Investment International Equity, 14.41%; and Putnam International Growth, 12.03%.

Tech funds. Individual tech stocks are enormously volatile. It's not uncommon for shares in companies like Amazon.com and Dell Computer to double in price -- or be almost halved -- in a few days or weeks. Given the limits on your mad money, you can get a much more diversified play from approximately 70 technology sector funds.

It's not as narrow a bet as it might seem, because technology is no longer a one-product sector. True, the headlines are dominated by the likes of Microsoft and Intel. But technology is now embedded in low-tech devices like coffeepots and toys. Silicon goes into cheap commodity chips like computer memory as well as pricey customized chips for autos and audio equipment. Cell phones, Internet routers, digital TV, and bar-code scanners all fall under this rubric. That's a big and diverse chunk of the economy.

Most tech funds can buy companies involved in any aspect of technology. Three top diversified funds: Alliance Technology, up 23.00% annually for five years; Seligman Communications & Information, 20.38%, and T. Rowe Price Science & Technology, 15.67%. Others, notably a group run by Fidelity Investments, target undiversified subsets of the sector, such as Fidelity Select Electronics, up 25.60% in the last five years, and Fidelity Select Computers, up 29.41%.

Hard asset funds. At the other extreme are the stocks of old-fashioned businesses like real estate and natural resources. Far less glamorous than technology, these funds have also returned far less to investors -- averages in single digits, mainly. But they provide exposure to the heart of the American economy, its manufacturers and service businesses, and are not whipsawed by events in Silicon Valley. They also provide a limited hedge against inflation. Funds ranked tops by Morningstar, as well as their average annual five-year returns, include T. Rowe Price New Era, 10.75%, Alpine U.S. Real Estate Equities, 11.94%, and Cohen & Steers Realty Shares, 9.24%.

What about gold funds? Forget them. The yellow metal has staged an impressive rally lately, with many gold funds surging 40% or more in September. But as an investment, you are better off with a Rolex. As a classic portfolio hedge against inflation -- the metal's only investment value -- "gold doesn't seem to be performing," says Steve Savage, editor of Value Line Mutual Fund Survey.

High-wire bonds. Fixed-income investing does not have to be boring. If you want to roll the bones with bonds, buy American Century Benham Target Maturity 2020 or 2025. Much like an individual investor, fund managers buy a set portfolio of bonds and hold them to the very last day of the year indicated in their name. In this case, they purchase zero-coupon U.S. Treasury bonds. They are called "zeroes" because they don't pay regular cash interest. Instead, like U.S. Savings bonds, you get the interest when the bond matures. As government securities, your principal is virtually guaranteed if you hold to maturity. The risk is that you might decide you have to sell before the maturity date while the market is depressed -- and that's no small risk, because zeroes are hypersensitive to changes in open-market interest rates. A change of one percentage point in rates will move the value of the Benham 2020 portfolio about 20%, up or down, and the 2025 fund about 25%.

This kind of volatility is extreme, but that's what makes it great for speculators. The 2020 portfolio spurted 31.55% as rates declined in 1993 and then tumbled 17.75% when they rose the following year. Big cuts in 1995 sent the fund soaring 61.38%. At a more normal government bond fund, T. Rowe Price U.S. Treasury Long Term, the corresponding numbers were 12.93%, minus 5.75% and 28.60%. If rates should tumble, well, hang on: You will get your money back in about 22 years with interest equal to 5.16% annually.

Is this any way to run a portfolio? Honestly, no. Investing intelligently will take time on your part. And, as we have noted, you might be better off spending it on your company, where you make your real money. But if you have the urge to play the market, at least play smart.

By Tim Middleton in Short Hills, N.J.

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