How to Manage Financial Risk Like A Poker Player
There are plenty of options available to take when it comes to financial investments. Statistics on assets show that more than half of US households hold a form of investment in the stock market, with many investing in the form of retirement accounts such as 401(k)s. All investments — real estate, stocks, cryptocurrencies, bonds, and the like — hold a certain level of financial risk. Earning high returns carries the possibility of significant losses, so it’s crucial to prepare yourself with the proper mindset needed for investing.
You can start practicing risk management with poker. As a game of strategy and uncertainty, poker can be a great way to exercise the mental toughness and decision-making needed for high-stake scenarios. Listed below are some of the ways you can manage financial risk like a poker player:
Avoid making decisions on high emotions
When it comes to decision-making, people often make mistakes when stressed out or too happy. A poker player may try to keep playing after losing a big pot just to regain the money they lost. They’re likely to do the same when on a winning streak and greedy for more wins. An investor may also fall into an identical trap where they become overconfident with their gains. Rather than letting emotions control your decisions, take the time to relax and look at your finances objectively by looking at past data. Depending on the type of investment you have, you can try strategies like dollar-cost averaging to minimize risk and keep your emotions in check.
Have patience to deal with losses
On top of keeping your emotions under control, it’s also essential to have patience. Pro poker players often sit around the table for hours to secure a good hand for playing, which is the key to winning big. These skills can translate well into managing other financial risks, especially investments that grow over time due to compounding interest. As famous investor Warren Buffett notes, “The stock market is a device for transferring money from the impatient to the patient.” While remaining consistent in your play is a good strategy, it’s also important to refine your techniques according to your losses — you can’t win by repeatedly playing the same losing strategy.
Treat your capital like a poker bankroll
A poker bankroll is the amount of money you have set aside to play with at the poker table and should be decisively maintained throughout the game. In basic poker bankroll management, you need to include downswings and losses in your calculations. This ensures you’re continually taking risks within your bankroll limitations and not taking harsh losses. Similarly, it’s essential not to put too much into investments beyond what you’re willing to lose. A great way to budget your money is first to establish savings worth 3-6 months of living expenses to pay for taxes, rent, and food, which can safeguard you from any bad runs.
Get as much information as possible
When playing poker, players in position and acting last can often calculate the pot odds before making their move. This allows them to make one of the best possible decisions on the felt, giving them an advantage over the players who played their hand before them. In the market context, trading in and out without reliable information can cost you a lot of money. For example, when considering investments in Mergers and Acquisitions, it’s important to first wait for official announcements rather than bet on rumors, allowing you to act appropriately later.