Do You Have A Plan By Chance?
Recently I had my first experience playing Blackjack at a casino. Anyone who knows me well knows that I don’t tend to gamble, mostly for the reason that winning requires skills, of which I have not had the experience to acquire, and in my opinion a hefty dash of luck (although some research out there may suggest otherwise). However as uncertain as I was to try my hand at Blackjack, I felt reassured knowing we had a plan of how much we would spend, knowing that when we did win, we’d play with those winnings first, and knowing when we would walk away. (Although the latter can be the hardest decision!)
Having a well thought out plan for your investments is very much the same, particularly during times of higher volatility and uncertainty. Recently I was asked if the plan would change if we experienced a market correction and my response was “not particularly”. A prudent investment and financial plan is forward thinking and already takes into consideration those periods of volatility as well as periods where things are going well in the markets.
That doesn’t mean a plan can’t be flexible and adjust based off changing timelines and goals but making knee jerk can derail long-term objectives and can ultimately affect returns.
In Blackjack the probability of winning is between 42% and 43% and the probability of losing is between 47% to 49%. Again, another reason why I am not a big gambler. On the other hand, over the last 91 years, the S&P 500 has had negative results in a one year period 27% of the time and as the chart below demonstrates, that likelihood of realizing a negative year of returns decreases the longer your investment timeline is. Hard to argue with those odds!
For both investing and gambling, risks are taken to ultimately receive a monetary reward. However, another main difference between gambling and investing is the willingness to accept risk and most importantly knowing one’s appropriate level of risk. For example if someone was given the scenario of receiving $100 or the 50/50 chance of receiving $200 or nothing and they chose the latter, that could be considered gambling. A way to mitigate this “all in” or “double or nothing” approach is through… yes I’m going to say it…. diversification.
Diversifying a portfolio not only provides exposure to areas of the market that act differently than, for example the S&P 500, but over time reduces risk and dampens volatility in the portfolio.
So whether you are trying your hand at the casino or looking at your investment portfolio… don’t forget the plan!