Casino odds are never in your favor. Even with a free buffet or hotel stay, it's near impossible to walk away a winner from most Las Vegas casino games. Simply put, if you play long enough the house always wins. Vegas, like the markets, is a zero-sum game (one party wins while the other party loses). What you may not realize is that your retirement nest egg may be in jeopardy to Vegas-style odds unless you possess the right amount of discipline and knowledge.
I imagine many investors and advisers would claim that they are not, in fact, gambling. I understand that there’s a certain level of pride in managing a portfolio and sharing your latest triumph over the market at the water cooler. It feels good to outsmart the market or even other investors, but could you really be gambling with your life savings? How would you even know?
Knowing The Danger Signs Is Your Best Bet
Just like any bad habit, there are danger signs that may tip you off that you’re placing high-stakes bets. Before you put another stack of chips on the table consider these seven signs that you’re gambling, rather than investing, your retirement savings:
1. No Exit Strategy. There are always two sides of a trade: a buy and a sell. Many investors and managers focus almost exclusively on when to buy, but if you’re void of a clearly defined exit strategy you’re just gambling. It’s more important to know when you’re going to sell than it is when you’re going to buy. After all, as the wise old saying goes, “the money is made in the exits.”
2. The Single Investment Approach. Using primarily one type of investment (i.e. only mutual funds, stocks, etc.) is akin to going all-in on one hand. There isn't a one-sized fits all investment product that operates well in different market conditions. A true investor incorporates many different types of investment vehicles to achieve true diversification with the goal of “absolute return” during any market, be it bull or bear.
3. The Love Affair. Many market gamblers do all the wrong things for all the right reasons. They buy and hold stocks of companies that they love. When asked why they, answer, “I like this company because they have a great product” or, “they’re a strong company and I've made money with them,” or “I feel like their stock is going up.” Investors know exactly why they bought or are holding a stock and it has nothing to do with loving a company or it’s products (which is emotional), rather it’s a sound and almost scientific reason (which is logical). Gamblers use feelings, investors use logic.
4. Constipation by Procrastination. Gamblers procrastinate and hold onto their losers way too long (see #6), investors have a Zen-like approach to managing their portfolio. They aren't necessarily timing the market, but they do follow a systematic approach to their buying and selling, not a feeling or a hunch.
5. Entertainment Addiction. One of the more obvious danger signs is when you follow the investment advice of a magazine or television personality. What you’re receiving isn't advice. It’s pure unabashed entertainment. (I say this as someone who’s appeared on almost every national financial news network.)This may disturb the cable networks and their addicted viewers, but if you’re looking to secure your financial future you won’t find the answer there.
6. Loser’s Remorse. The famed trader Paul Tudor Jones said, “Losers average losers,” meaning that stock gamblers have the tendency to double-down on a losing trade only to wind up watching it go even lower. Successful investors know exactly when they are selling (at a set price) before the investment is even initially made. They know from the get-go what their risk and pain threshold is.
7. Palm Reading and Fortune Telling. We are inundated daily with information. There’s a plethora of data vying for your attention: unemployment reports, crop yields, weather patterns, GDP data, retail sales, earnings reports, Federal Reserve notes, geopolitical events, and the list goes on. Market gamblers pretend to be able to digest and discern all this information, and more, believe they’re able to make a profitable investment decision. Wise investors know that this is impossible for any human (or algorithm) to accomplish and that there’s only one data point that matters: price. The price of an asset has all of the necessary data baked in. It’s really that simple. If anyone tells you different, even with a a team of analysts, economists, and researchers to help them predict market moves, they’re still gambling.
Robert Russell is the author of Retirement Held Hostage, CEO & CIO of the Ohio-based Russell & Company, a private wealth management firm specializing in helping affluent individuals ages 45 and up create and preserve their wealth. He co-hosts a radio show, authors The Rob Report blog, and is a frequent contributor to The Wall Street Journal, SmartMoney, & FOX Business.