Gambling With An Investment Strategy

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Gambling or InvestingGambling and investing tend not to fall in the same sentence, yet the line between the two can be blurry at times.  Each can force images of losing it all or winning it big in a single moment.  When you picture gambling, it’s the 24 hour gambling mecca of Vegas, a cheering craps table, the alarms of the slot machine.  A place to let loose, have some fun, spend some money.

Gambling can be broken down into two categories.  There are the games of pure chance, like  the lottery, slot machines or roulette.  These require absolutely no thought or skill to play and even less to win.  I guess you could argue that picking numbers requires some thought, but it’s about as much as one would put into breathing.  And the odds of winning are the same every time you play.

Then there are the skill games, like blackjack, poker or baccarat.  Skill isn’t a requirement per say, even the most unskilled player can get lucky.  But your chances are increased significantly when you have some knowledge of the game.  Knowing that the odds change each play and can be in your favor.  It can range from speculation to guarantee.  Yet it’s tossed in with the lotteries and slot machines because it’s not common knowledge to everyone.  Unfortunately the same can be said about investing.

Gambling With Your Investments?

It’s a simple question actually.  Are you gambling with your investments?  How much do you really know about where your money’s at?  If you sat down with a stranger tomorrow could you explain to them what those investments are, how they work, the risks involved, the probability of loss or gain?  If the answer is no then there might be more gambling going on than investing.

It’s an easy fix too.  A good book or financial blog may be all that’s needed to fill in the knowledge gap.  Or just get out of those investments that aren’t entirely understood.  The added knowledge gives us a better understanding of the risks involved.

A Healthy Amount Of Risk

If you’re collecting interest on money in a savings account or CD and the bank goes under the FDIC has you covered.  You may risk losing an interest payment which is minimal (as in less than 1% these days) but your balance is insured.  Which may be an overly healthy amount of risk.

What if it was money in a mutual fund or stock that dropped 5%, 20%, or 50% would it still be a healthy amount of risk?  Maybe, if that fund or stock made up just a small part of your total investments.  Which is why diversification is preached so often.  Who knows, maybe you can handle a 50% loss.  Some can.  But eventually that can only be decided by your own comfort level.

More Investing Some Speculation

Speculative investing tends to sit right on that gambling and investing line.  During the dot com boom and bust, there was a lot of speculation.  We all know about the success of Amazon but do you remember Webvan, Pets.com or eToys.  Those who made a lot of money only risked a portion of their overall investments.  But they speculated on something unknown because the potential gain was worth the risk.

I’ll say it now, speculation isn’t for everyone and should only make up a small part of any investment strategy.  I usually settle around 10%-20% of my own investments as speculation.  Because that’s what my comfort level allows.  That money could be in one or two high risk stocks or a high risk mutual fund.  It all depends on whether I find anything worth the risk.

A good guide is to start out small, like 5%, if speculation is something that fits your investment strategy.  You can adjust the amount to fit your comfort level accordingly.

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Comments

  1. says

    When allocating a percentage of your portfolio to high risk types, you should only allocate an amount that you would be OK with if you lost it all. Rule of thumb is that if you’re not comfortable with that, you shouldn’t be in the investment!

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