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Place Your Bets! Winning Strategies for Your 401k


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.)

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 401k 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, 401k 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. 401k 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 401k 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 401k 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 401k 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 401k 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.

This is for educational purposes only. 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 representative for rules specific to your plan.

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