Diversify and Discipline in Gambling and Investing by @AZanswers

Diversify and Discipline in Gambling and Investing


by Ann Zuraw | Featured Contributor 

While many people see investing as “betting,” my experience has shown other- wise. That being said, there are several key takeaways from gambling that are important to remember while investing. Discipline and diversification are two of the key aspects to both investing and gambling. Investment diversification is investing in different asset classes and strategies. When gambling with roulette, diversification is spreading out your chips. Discipline in both investing and roulette is knowing how much you can afford to invest, and  when to stop if you are losing money or  reached your goal.

When we invest our money in the stock market, we want our initial capital to grow, and when we place a bet, we are hoping for the same results.

It makes me cringe when I hear someone refer to their investment as “betting in the market.” In order to manage institutional money, I had to get both an MBA and CFA®(Chartered Financial Analyst)—so I come from the perspective that you have to be trained to manage money. When I invest, I certainly don’t consider it a bet or gambling.

This week I went to Las Vegas for an investment meeting. I had to walk through the casino to get to the conference center.  I would never consider myself a gambler but today was my birthday – and I figured why not. I told myself that I was going to bet on the roulette table but no more than $50, and once that was lost – I would quit. Now, for someone that hates losing money—this was hard to make myself do…(I know everyone out there who loves gambling in Vegas is probably amused by this statement. )

After wandering around for quite a while, I found the roulette table. The dealer did not have anyone at his table until I sat down. Fortunately for me, he explained how the game is played with a minimum bet of $25. I thought this meant one number for $25. Then he explained that you could put one $5 chip in the middle of four numbers—so at that point I spread out my chips (increasing my odds of winning). As a portfolio manager that invests for a living—this was very appealing—DIVERSIFICATION! I did not have to pick one number—and using this method I got to invest in 20 out of 36 numbers. While investing, I spend a good portion of my day making sure client’s portfolios are diversified. This is in terms of equity asset classes defined in a number of ways such as small-cap, mid-cap, large-cap, international, US, Emerging-market stocks, and preferred stocks. I spend entire days studying the overabundance of information the world of investing has to offer to implement strategies that work.

When you win in gambling, everyone says “you were lucky.” I also hear this when you have investment success. But luck only comes from taking advantage of opportunities. In the case of the roulette table, it was having the nerve to put any money down in the first place. With investing, you have to take some risk by being willing to put money in the stock market. There are always going to be reasons not to invest— a trade war, valuations, complexity, a chance of 20% correction…but if you don’t invest then you have no chance of increasing your returns. I have been investing in the stock market both personally and professionally for my entire life. I spend most of my time studying various aspects. But there are fundamental rules that I do adhere to —such as not owning a large portion of the portfolio in one stock, and having the discipline to maintain a targeted asset allocation. So when the dealer explained to me that I could diversify my $25 of $5 chips—I was excited. Still, I realized the roulette table is going to dictate the winner—just as the investment markets will dictate the gains.

Investing, similar to gambling benefits from both diversification and discipline. You must decide how much money you are willing to risk in order to gain.You have to know when to walk away ( which takes discipline when you win) or re-balance your target.

By the way,in case you are interested, I did win $20 on my $25 bet. After winning twice, I walked away. (The dealer heard me when I first sat down promising myself that if I won I would walk away. He handed me my chips in spite of the other players encouraging me to stay. )

For those of you considering investing, capture your risk tolerance and see if your portfolio fits you.

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