Know Your Limit, Risk Tolerance, And When To Stop Gambling

by Hank Coleman

You should know your limit when you are gambling. How much can you afford to lose? When I went to Las Vegas, I took $500 out of the bank in cash, and that was my gambling money. That is all I wanted to lose. That was my limit. I would not go back to the ATM machine, and I would not go back into my wallet for more money. I left my checkbook and credit cards at home as well.

It takes discipline to know your limits. You can get swept up on the excitement and thrill of receiving money that you did not earn. But, the game is rigged against you. And, it is in your best interest to realize this going into the game. The mistake that a lot of people make is that they fail to realize that they are going to lose their money. They are not losing their money per se but actually paying the casino for the thrill. It is no different than riding Space Mountain at Disney World. It is the same thrill, but it is a different payment structure and time requirement.

In investing, it is important to understand your limits and your risk tolerance. How much can you stomach to lose in your investments? In the past, most investors fibbed to their financial planners and said that they could take a onetime 30% correction in the stock market because they were long term investors. 2008 proved most investors to be less tolerant to losses than they thought. Many investors fled stocks and mutual funds in record numbers at the worst possible moment when stocks were at their lowest point.

The hardest part is knowing yourself whether it is when you are gambling in Las Vegas or investing in the stock market. You have to know how much you can really stand to lose in order to adequately invest your money. What is the right split between stocks and bonds for your own situation? Everyone’s situation is different and everyone’s risk appetite is different as well. Now is the perfect time since the worst of the recession seems to be behind us to reevaluate your own risk tolerance and asset allocations. How well are you diversified? Do you need to scale back the risks you are taking in your investment portfolio? Can you stand another drop in the stock market or are you gun shy now? Know your limits going into the game, and do not get blinded by greed.

This is the fifth post of a seven part series of what Las Vegas can teach us all about personal finance. Check out the others in the series below…

Just to be clear….in no way am I advocating gambling. If you think that you may have a gambling problem, you should find help as soon as you can. There is help available. You can find help andresources at the Gambler’s Anonymous website, the National Council on Problem Gambling, and the National Center of Responsible Gaming.

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{ 4 comments… read them below or add one }

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Steaming Pile April 13, 2010 at 9:28 am

Don’t you hate it when people drop flaming bags of spam on your doorstep?

Back on topic, the absolute worst time to pull out of the market is after it just took that 30% dump. I had to remind myself of that in March 2009, and it paid off. I was back in the the black by the summer. In fact, if you still had money, that was a good time to buy, so it turned out. Funny, that; it’s when the economy is at its weakest ebb that the greatest bargains are to be had in the stock market, but you probably don’t have any money because the economy is in the dumper.

Mutual Funds April 15, 2010 at 12:21 pm

For some, gambling becomes an addiction that threatens their financial health and personal relationships.

Stop gambling May 17, 2010 at 5:49 am

The truth is that gambling habits that start off as just recreation can turn into full-fledged gambling addictions and gambling problems, people will run their families into bankruptcy by scratching lottery tix of playing the AutoLotto hoping to win big.

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