Are you speculating or gambling with your retirement money?
I’ve only been to a casino twice in my life. The first time was the summer after I graduated high school. A friend and I took a Greyhound bus just over the border into Windsor, Ontario, and stayed there until just after dinner before returning home on the bus.
Before I left, I carefully decided how much money I needed for food and how much money I was willing to completely lose to playing at the casino. I set aside $20 for my lunch and snacks and had another $40 that I had determined would be OK if I ended up losing it all.
Once I got to the casino, I took my $40 and exchanged it for the casino’s tokens and asked for two cups. I put all $40 worth of tokens into one cup and the second cup was for any winnings from the day. I remember having fun playing the slots and some other machine-based games. Every time I played, I pulled the coins from the first cup. Every time I won, I placed the winnings into the second cup.
At the end of the day, I spent $18 of my $20 on food, and had kept $18 of winnings from my original $40. So, I took $60 and was willing to part with it all, and I was able to come back home with $20. I had fun and stayed disciplined with my tokens… for the most part. I have to confess that I pulled some from my winnings cup to play a few more rounds.
Now, I want to take a quick break and be clear that I do not advocate that anyone should go to casinos or engage in gambling of any kind. By design, gambling of any kind (including playing the lottery) is a loser’s game and the house always wins. It can be addictive and destroy lives.
I also believe that no one should gamble their life savings.
If you have read some of the earlier blog posts, you may have grasped that I am a believer in free markets and a passive investing philosophy. One of the biggest reasons I am a believer in these concepts is because they work, have been academically tested, and many investors who have adopted this philosophy as their own have reaped the benefits.
I also believe that active management is a form of speculation and gambling with the money you need to live on in the future and the money you want to have set aside for your legacy. Active management of your portfolio can be you buying and selling stocks, trying to time the market, or using a fund manager who engages in these methods. These are the warning signs that you may be speculating or gambling with your money.
A lot of people I meet may believe they are not doing any of these things because they aren’t the ones actually doing it, but chances are they are actually paying an advisor and/or a mutual fund manager who is doing it on their behalf.
If you want to compare it to my casino story from earlier, it would be as though the $60 was the money you gave me to start. I charged a $20 fee for my expenses and invested the other $40 on your behalf. I spend my time analyzing which machines to play and when I think which slot will pay out. I guess wrong a lot of the time, though I still show some earnings. At the end of the day, your $40 has now become $18 and you are unhappy.
Though this analogy is kind of crude, it is pretty close to what happens in real life to some investors. They get sold a product or a mutual fund that seems pretty good and they decide to invest a portion or all of their money in it. The fund manager charges a fee and then underperforms his benchmark and the investor is left with the rest.
How can you be certain that you are not gambling with your retirement? You can read these 20 Must-Answer Questions as a self quiz. You can also set up a time to speak with me. I would love to help you begin your journey towards financial peace of mind.