What can the game of poker teach you about investing?

While it might not be obvious at first glance, investing and poker have a lot in common. Both involve calculated risk-taking, require keeping emotions in check, and can involve luck for short-term success – but need considerable skill to win out in the long run.

In fact, a study found that fund managers who do well in poker tournaments also boast significantly better investment returns. So, here are 4 lessons from poker you could use to improve your investing game.

1. Distinguish between luck and skill

In poker and investing, you have to be able to differentiate between luck and skill. Sure, both factors play a role, but neglecting principles like diversification is much more likely to lead to an unsustainable strategy.

A useful approach to decision-making is to envision repeating a particular action one hundred times. Will it consistently yield positive results? While short-term outcomes tend to be unpredictable, maintaining a consistent decision-making process ensures that, over time, you’ll have more favourable outcomes.

2. Control your emotions

Both poker and investing can be emotional rollercoasters, but it’s vital to avoid making decisions based on fear, greed, or ego. Think of it this way: the best poker players play the same no matter which way the last hand went.

Similarly, emotional control ensures that investors remain level-headed in times of volatility. It’s tempting to panic and sell during downturns – potentially at the worst possible time. In most cases, you’re better off staying invested over the long run with a well-diversified portfolio.

3. Diversify, diversify, diversify

Just as poker players won't go all-in on every hand, investors shouldn't put all their money into a single stock or asset class. With diversification, you mitigate the potential downside that a single stock’s poor performance can have on your portfolio. If one investment falters, others might perform well, offsetting your losses.

And there’s more: individual asset classes behave differently, depending on the economic environment. So by combining multiple asset classes in a portfolio, you can better withstand changing economic conditions.

4. Sit at the right table

In poker, this is known as “game selection”, or trying to find the most profitable tables to sit at. It’s similar to investing: it’s useful to find a niche, and focus on those opportunities.

Take Warren Buffett, for example. As a value investor, he’ll only sit at an “investment table” with undervalued stocks. He zeroes in on value stocks, which is his forte, and stays away from speculative growth stocks (our Jargon Buster below breaks these down).

If you don’t have a niche, that’s fine: you could always stick to passive investing through index funds and ETFs. Our Flexible Portfolios let you do this easily – mix and match any number of ETFs which replicate individual stock indexes, or even just one which tracks the world at large; it’s that flexible.

📰 In Other News: American shoppers aren’t flinching in the face of inflation

US consumers are still spending in earnest, seemingly unfazed by higher prices. Retail sales grew by 0.7% in September from the month before – well ahead of the 0.3% gain forecast by economists. This stands out even more when factoring in September’s 0.4% monthly inflation rate – consumers seem to be keeping up with rising prices.

What’s more, monthly retail sales data has now seen six-straight months of growth, defying economists’ prediction of a slowdown. See, experts have been expecting a sharp dent in consumer spending, with most Americans having used up all their pandemic-era savings – but so far, that hasn’t happened (not yet, at least).

But a resilient US economy means the Federal Reserve’s job of cooling the country’s still-hot inflation might not be done just yet, opening the door for another possible economy-slowing interest rate hike before the end of the year.

This article was written in collaboration with Finimize.

🎓 Jargon Buster: Growth stocks and value stocks

Growth stocks belong to companies expected to grow at an above-average rate – think of tech startups. On the other hand, value stocks are like hidden gems, stocks that are trading at a lower price often due to being overlooked or underestimated. So, in the simplest terms, growth stock investors are betting on potential, while value stock investors are bargain hunters.