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Should you treat your retirement
money like a gambling bankroll? Yes, if you use it like a true card shark and not like
a sucker. Believe it or not, the lessons that successful gamblers learned the hard way can
also be useful for your retirement planning.
Before I go any farther, let me say
this clearly: I'm not advocating that you literally gamble with your retirement money.
Nor am I saying that investing for retirement is like shooting craps. Taking your
retirement money into a casino would be a sucker bet.
What I am saying is that
gambling theoreticians have a thing or two to say about how to minimize your luck
factor and maximize your advantage when creating a long-term investment plan.
Playing the Odds
My first experience with gambling
theory came when I was in college. One of my friends was making extra income by playing
poker on the weekends at a local (and legal) card room. I warned him that his luck would
run out and "the odds will even out in the end."
He replied that the odds were exactly
what he was counting on — people who buck the odds do eventually lose. But for
good players, who don't buck the odds, short-term gains and losses tend to even out
in the end and become a fairly predictable rate of return.
This was an interesting revelation.
The word "gambling" had two different meanings for us. For me, it meant randomly
throwing money down and hoping for good luck. For him, it meant finding situations where
he could see a mathematical advantage, and only then putting capital at risk. (In fact,
the first definition for "gamble" in Merriam-Webster's Collegiate Dictionary,
Tenth Edition, is simply "to play a game for money or property." The idea of
uncertainty only comes up in the second definition.)
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| "Any
money you don't lose is just as good as money you win." |
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Mike Caro, author of Fundamental Secrets of Winning Poker. |
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By my senior year, I was playing cards
every weekend — and earning steady income from it. I read books like Mike Caro's Fundamental
Secrets of Winning Poker, David Sklansky's Theory of Poker and Mason Malmuth's Gambling
Theory and Other Topics. These books teach concepts similar to those that you'd learn
in good investment books, and include some concepts that should be taught to investors but
often aren't. Again, I'm not advocating gambling, but here are some of the lessons from
them that also apply to retirement investing.
Knowledge is Power
Know the rules of the game.
A good poker player would never sit in a game without first getting familiar with the
"house rules." Similarly, it's critical to educate yourself about your 401(k)
plan's rules about withdrawals, vesting, fees and so on. The summary plan description (a
document that should be given to you when you enroll) and your account statements should
contain this information. Read them carefully. Too often, 401(k) participants don't find
out about features that they can take advantage of (such as an employer-matching
contribution) until it's too late to use them.
Discipline is Key
Don't spend your bankroll.
Conserving your bankroll is the first rule of staying in the game. The best professional
gamblers require a bankroll that can carry them through several losing sessions in a row.
For the retirement investor, market volatility can produce occasional short-term losses
that you need to weather. Build up your balance by contributing the most you can afford
and try to avoid taking out loans or cashing out. Otherwise, you could be left short when
you need the money the most.
The person who "tilts"
the least will make the most money. A player who tilts is somewhat like a pinball
machine that is shaken too hard. "Their lights go out, their flippers stop working,
and you can see the word TILT flashing in their eyes," Caro said in his book.
In other words, they act irrationally or even panic.
The "Law of Least Tilt" says
that all other factors being equal, those who tilt the least are usually the big winners
over the long run. This law was developed by Caro. He was once called "the finest
draw poker player alive" by World Series of Poker winner Doyle Brunson.
When you made your retirement plans,
did you count on investment returns of 15 or 20 percent indefinitely? Did you invest your
entire portfolio in tech stocks after years of high growth? Did you sell out of a
well-diversified portfolio when the markets went south, convinced that the market was
crashing? These are all "tilt" behaviors.
Don't beat yourself up if it happens
to you; everyone tilts at some point. The key is to recognize you tilted and to get back
on track. Being a disciplined investor can help you build a significant portfolio over the
years.
Play your best game all the
time. If you've developed a sound portfolio strategy, don't try to time the
market. Market timers — especially non-professionals — often end up buying when
prices are high and selling when they're low. 401(k) participants who build a
well-diversified portfolio, stick to their plan and rebalance it regularly will be
the big winners in the retirement game. "Any money you don't lose is just as good as
money you win," Caro said.
Paying to Play
Don't pay too much for the
privilege of playing. Where poker is played, the house makes money by charging a
"rake," or a percentage of each pot wagered. The rake influences poker strategy,
just as taxes and transaction costs should influence your retirement saving strategy. In
poker, when the rake is high, players tend to play fewer hands. When it's low, they can
afford to play more hands because the costs per hand aren't as high.
When it comes to your 401(k) account,
you'll have to pay fees for maintaining the account and investments. As long as these fees
are reasonable, they're worth it because they let you take advantage of tax-deferred
savings. Think of your 401(k) plan fees as the rake you have to pay in order to play the
tax-deferred saving game.
If you were saving in a taxable
account, you'd have to pay a huge rake for each of your winners —
capital gains taxes. Saving in your 401(k) is like playing in a "low-rake" game.
You can think about investing aggressively for the long-term in accordance with your
risk tolerance because you won't have to pay capital gains taxes on your earnings.
Your assets can grow tax-free until you retire and take the money out, at which point you
pay income taxes on your withdrawals.
Participating in your 401(k) account
is one of the best options you have to make a comfortable retirement for yourself.
Remember — you can't win if you don't play.
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The information provided here is intended to help you understand the general issue and
does not constitute any tax, investment or legal advice. Consult your financial, tax or
legal advisor regarding your own unique situation and your company's benefits
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