How to Manage the Gambler’s Portfolio

I saw a survey from a wealth manager which asked this simple question: “What does the portfolio of a gambler look like?”

Many investors don’t realize they are dealing with gambling outcomes, thereby exposing themselves to “gambling risk”, or risks that continue to grow exponentially and in severity. This new investment dynamic makes the mitigation of such gambling risks in a portfolio critical and begs the question: Are you rolling the dice with your investments?

The most difficult part about gambling success (in any form) is that it instills an inflated sense of confidence that border on dangerous. It’s easy to feel like the winning streak will never end, and it can be detrimental if you’re caught betting with that mentality. It’s an unfortunate reality that your hot streak will eventually end. And, if you keep betting larger and larger stakes, chasing the next allusive winning streak, eventually it will be time to call Gamblers Anonymous.

The good news? If you know how to manage your “investment hot streak” short term successes can be truly beneficial to your financial future.

Here are four tips for what you should be doing during and after an “investment hot streak”

1.Take Some Off the Top

Most gamblers, if they’re lucky, might make enough money to slowly grow their bankroll over a period of time. Somewhat counterintuitively, when you’re investing and winning big, you should handle things a little differently.

If you’ve ever been to a casino, it’s likely that you took out a certain amount of money and noted that if that amount is lost, you’re calling it a day. While this might feel like a disciplined approach to the situation, investors who “gamble” need to take it a step further.

You shouldn’t just be planning for what you’ll do in the event of a loss, but also strategizing a game plan for what you’ll do if you win.

If your investments are tantamount to gambling a given “bankroll”, you should set a dollar amount that, if you get it, you’ll start putting some of your gains away in more stable, less risky, non-correlated hedging (or risk management) investments.

Assuming that you’re actually trying to make some money and not just grow your betting bankroll, it’s crucial that you don’t roll all of your gains back into a gambler’s portfolio.

2. Realize It’s Going to End

No gambler who is on a hot streak wants to hear this advice, but it’s necessary: The good luck will eventually run out. You see it all of the time, the gambler thinks they’ve beat the system or through their cunning and some higher mental capabilities feel they can never lose.

Perhaps the worst thing you can do when you’re going through a good period of investment wins is go full-tilt and start making investments that are well out of your normal range. In fact, that’s exactly what the markets are hoping you’ll do. Remember, for every buyer there is a seller. You need to capitalize on your overall success when the opportunity presents itself.

3. Track your investments

It’s not just as simple as knowing which investment you’re the most familiar with. Sometimes you can actually know an investment too well and suffer from a “paralysis by analysis” situation.

Ideally, you would already be tracking your investments so you can get a better feel for them and those that you’ve had success with over time. However, if you haven’t been tracking your investments up to current time, there’s never a bad time to start.

Remember investments don’t know if or when you’ve purchased them. If you’re up a larger percentage, ask yourself what the probability of your investments continuing on that same velocity and/or chance of reversal. Tracking each position is critical to investment decision making.

4. Scale Back

If you’re doing well and higher risking investing remains within your risk tolerance, I would never suggest that you stop investing in a segment altogether. However, if you find yourself in the fortunate situation where you’ve made some large gains in high risk positions, don’t go throwing it all away by wagering higher percentages in similar types of investments.

For example, if you started with 10% of your money in high risk investments and now that represents 60% of your portfolio, rebalance your portfolio and scale back your overall risk proportionately.

Once you’ve made some gains, the only way it goes to waste is if you lose it all on future higher risk investments. Gamblers tend to lose when they believe they are just risking the “house’s money”.

Obviously, your goal is going to be to continue gaining more, but more doesn’t necessarily have to mean gambling more or risking all of your money earned.

Of all things to consider, learning how to best manage a winning streak is one of the best problems to have. It can be difficult to be disciplined when you feel untouchable, but remember, this is a time where you can actually profit. These situations don’t come around often, but if you can maximize your gains and protect your downside, it happens often enough.

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