Have you ever gambled at a casino and felt the sheer emotional excitement that winning brings? On the flip side, how you ever lost money and felt the dejection that ensues?
What about the stock markets? Do you feel the same way when a stock appreciates and makes you money AND feel the same dejection when it loses money?
Many forms of stock market investing are being influenced heavily by gambling, and directly by human emotion. The goal of any retirement plan is to help the investor to realize the potential mistakes and how to put yourself into a better position with your retirement portfolio. Far too often, though, investors and advisers fail to recognize that the risk being taken should decrease as they inch closer to retirement – but this does not happen sometimes. As a result, the risk reduction is not as much for the avoidance of losing money as it is the avoidance of jeopardizing your potential and future retirement income.
Four Similarities: What Are They?
There are four similarities between gambling and investing. They are:
- Social Proofing: When the social pressures that hit you from all angles, such as friends, family members, the media, etc, inducing you to trade or invest in a certain way when you didn’t initially have a plan to do so. This is also known as ‘Peer Pressure’.
- Trading: This is the most extreme form of investment gambling there is, and surprisingly almost everything that is available on Wall Street is built on trading. Just like walking in to a casino where ‘the house always wins’, the stock markets and institutional level traders are in the same boat – so you & I (the individual investors) begin with a disadvantage from the start.
- Failing To Reduce Risk In Retirement: In gambling, when you have amassed a large sum of chips or have made some money, it is easy to become greedy. It gets hard to walk away when you are winning and have more money in your hands. If you have been investing your money in the markets for 40 years or more in your 401(k) plan, most fail to realize that the bulk of that money was put there BY THEM – not the stock market – through your employer payroll system. But, most fail to reduce the risk when moving into preservation for retirement needs. This is called Reverse Dollar-Cost Averaging, which is when you are taking money out of a depreciating asset. Very dangerous.
- Hiring The Wrong Type of Adviser: Some try to remove the gambling and emotional instincts from their investment habits by hiring and adviser or a firm to manage things for them – but this is not always successful. You may not be better off from a risk standpoint. Most advisers will use an ‘asset allocation’ method based on a mix of options based on several moving factors, but asset allocation will not help you avoid risk entirely and most asset allocations lost money in 2002 and 2008.
So, who is right and who is wrong? Neither, sadly. It is a combination – and it is up to you to determine the mix.
How do you decide between them? Take the emotion out of it and look at the numbers – because numbers do not lie. Determine your ‘Required Income’ need, solve it with a guaranteed income plan and then choose your risk tolerance for your remaining balance. It is that simple – and we do the math for you.
Tune in to Income For Life Radio this week as we discuss The Correlation Between Gambling and Investing.
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Matt Nelson, president and host of Income For Life Radio
Income For Life LLC
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