• Robert Dunn, CFP®

Be an Investor, Not a Gambler


Key Takeaways

  • It’s okay to make a friendly wager or two during football season; but don’t gamble with your financial plan.

  • Even in this highly volatile market, there are a number of opportunities for smart investors to take some control.

  • Consider a Roth conversion if you are close to retirement or your income will be lower than usual. Buy stocks on sale. Harvest some losses. Sell some company stock.

With the National Football League regular season now underway, thoughts naturally turn to tailgating, fall foliage and America’s favorite pastime – wagering. Oddsmakers should have a field day this year as there is no clear-cut favorite to win the Super Bowl. I’m sure bettors will succumb to many of the same behavioral finance biases that bedevil investors such as Recency Bias, Overconfidence Bias, Following the Herd, Anchoring, and of course, Loss Aversion.

The defending Super Bowl champion Los Angeles Rams look strong again, but most oddsmakers have given at least four other teams (Buffalo, Green Bay, Tampa and Kansas City) better odds of winning the Super Bowl. That said, no one (including Tom Brady and the Bucs) is coming in at better than 7-1 odds. Meanwhile a number of young, fast-improving teams (think growth stocks) should be contending for playoff slots as well (Cincinnati, Cleveland, Philadelphia, Denver, LA Chargers among others).

With that much uncertainty, there’s sure to be plenty of heartbreak and volatility on the football field this fall. Great for TV networks and oddsmakers (i.e., the market). Not so great for players, coaches and the fans who wager on them.


No Sure Thing On The Field Or In The Market

Despite what you see on the high testosterone sports shows, no one knows for sure how the 2022 season will turn out. That’s why I don’t gamble except for buying a $20 Super Bowl square at my local deli. I learned my lesson in my younger days, having been burned on too many four-game parlays (aka “teaser bets”) and too many ill-advised emotional bets on my home team New York Jets. But wagering is what makes watching sports so much fun for fans. If you like to wager, go ahead and enjoy yourself. Just make sure you’re doing it for entertainment and that you stay mindful of the amount you’re risking. Gambling should never be a wealth building or retirement saving strategy.


I bring up gambling because now is when we tend to get the question: “What do we think of the markets?” as we head into the final months of the calendar year. We are not paid to predict the future. We are paid to improve the probability of our clients meeting their goals. If we attempted to predict the market using “odds” or “forecasts,” we would usually fall short of the goals each client has set out.


What are the variables that could go into determining the final outcome of the NFL season? There are too many to count, including injuries, bad weather, COVID quarantines and key players suspended for violating various “league policies.” Do you think it is any different when attempting to predict the direction of the stock market? Here are just some of the confounding variables we have to contend with today:

  • Price of oil

  • Consumer sentiment

  • Interest Rates

  • Unemployment

  • Salary

  • Shipping

  • Inflation

  • Supply chain disruption

  • War

  • COVID

I’m sure I’ve left off many others. So, if we were to apply gambling odds to all the variable listed, do you think we would have a lot of success? No likely. Same goes for investing. But gambling is what so many investors and savers are doing when they chase the next hot stock or sector; or when they try to get in or out of the markets “just at the right time;” or when they try to “get out in front” of the Fed’s next move.

There are myriad online sites offering gamblers the can’t-lose “lock of the week” and arcane statistics to make better informed betting decisions. In the same vein, financial services firms assign analysts to review companies and sectors and then peddle the “analysis” to the general public as gospel. Too many people are confused with what it means to truly invest. When it comes to investing, there’s no such thing as a “lock.”


Just know that only eight teams have ever won back-to-back Super Bowls in the nearly 60 years the Big Game has been played. No team has ever three-peated as NFL champions. Same goes for asset classes. As this famous chart below shows, no asset class ever stays atop the market every year. You need to remain diversified and make regular adjustments to your portfolio.


Control What You Can Control

That’s why I remind Novi clients that even in this highly volatile market, there are a number of opportunities for smart investors to take some control. You can do a Roth conversion if your income will be lower than usual, or if you’re getting close to retirement and want to minimize your tax bite in your post-working years. You can shift a little more of your portfolio to the equity side when markets are down so you’re essentially buying stocks on sale. You can harvest some losses to offset big gains you’ve had during the recent bull market. You can sell some of the company stock you’ve accumulated for years to diversify your portfolio and to reduce concentration risk without racking up big capital gains.


People get so caught up in what’s taking place in the market today that they think that trajectory will go on a long time. Behavioral finance theory calls this “recency bias.” Why do so many people rush to make decisions today on assets that they’re not going to touch for many, many years?


There’s just a mind-boggling amount of information you need to get correct in this climate in order to make a sound investment decision. Participating in the stock market long-term – not gambling in the short term – is how smart investors win the game.


Conclusion

If you or someone close to you has concerns about your portfolio’s ability to withstand inflation, recession and market volatility, contact us any time to discuss. We’re happy to help.

 

ROBERT B. DUNN, CFP® is the President and Managing Partner of Novi Wealth