Dysfunctional Financial Personality #8 - The Compulsive Gambler
1 October 2006This is part eight in a series on problematic personality traits people have that interfere with their personal finances. Before, we’ve looked at the Peacock, the Mattress Stuffer, the Foot Dragger, the Emotional Spender, the Obsessive Tightwad, the Revolving Door Romantic, and the Moocher. Today we’re looking at a more recognized personality type, but one that might be more common than you think: The Compulsive Gambler.
The traditional compulsive gambler is something everyone’s heard about. They are addicted to gambling because of the euphoric high the “win” produces - even if in the long run, they know they’re losing money. That doesn’t matter to them, because while the low of losing is indeed a low, they know they can win their money back on the next play. Frequently, they’ll even gamble away money that was meant to bail them out. When they’ve convinced family and friends to give them what they need to pay off their debts, they convince themselves that they should just make one more try at it. After all, when they win, they’ll both be able to pay down the debt and have a little money to build up their stake again. It’s a downward spiral that doesn’t stop until the Compulsive Gambler is completely out of money to spend on their habit.
That causes a disaster for the family finances, not to mention the personal lives of the Compulsive Gambler and their family. These women gambled away hundreds of thousands of dollars, missed out on their children’s youth, and one even went to prison. These college students racked up huge credit card debts playing in poker tournaments. This man gambled away his retirement savings at age 75 after his wife died. 80% of Compulsive Gamblers have thought about suicide, and 20% have attempted it or actually succeeded.
And it’s not just people who are engaged in actual gambling. One of the bigger problems is that many people gamble with their financial portfolios because of the high they get, particularly when trading stocks. For example, as a part of the “day trading” trend, some people have even quit their jobs to focus entirely on day trading for a living. Others don’t go that far, but still put a high percentage of their money into stocks that are extremely risky. From penny stocks to buying more than they can afford using margin to trading in obscure commodity markets, Compulsive Gamblers who use the stock market to get their high often put their entire retirement portfolios at risk. What kinds of portfolio activity suggest you might be a Compulsive Gambler?
Buying on margin, for one. Most brokerages will allow someone to do this with no credit check or anything as long as you’ve got some money in the account. They’ll let you buy more stock than you can afford, often letting you spend up to double the amount in your account. That means you can gain a lot more with your money than you would otherwise - you can get double the gains if the stock goes up. But you can also have double the losses, and you can lose more money than you actually invested. It’s a high risk trading device that is not used by most ordinary investors.
Selling short is another one. With this investing strategy, you sell stock you don’t own in the hopes that it will go down. So if you think Apple Computer is going to have a bad month, you “sell” the stock - you sell a contract to supply Apple shares at the current price after a certain time period passes. If the stock goes down, you buy the shares at the lower price, and pocket the difference. If it goes up, though, you lose whatever amount the stock increases.
Churning your portfolio is another potentially bad sign. This just means that you are constantly buying and selling stocks at a frequent rate. Most people don’t do this - they buy a stock they like and hold onto it awhile. Some people buy, hold for a few days, and then sell, trying to get a quick gain.
Trading in risky investments can be a sign that you’re a Compulsive Gambler, too. Is all your money in commodities like oil? Are you speculating on currency fluctuations? Again, this is not normal investing activity.
Finally, there’s trading on “hot tips.” People do this sometimes when a friend of a friend tells them a company will be sold, or is making a lot of money. They don’t have any real basis to buy the stock, but instead just buy it on a rumor.
A lot of you may be saying “Hey! I do X, and I’m not a gambler!” That’s true of many people who use these strategies. They are all valid things you can do with your money, and you can make a lot of money with them if you know what you’re doing. But they are SIGNS that you might have a tendency to gamble. What you need to ask yourself next is this: How much of my portfolio is at risk on any given day from these methods of trading? If you have $300,000 in the bank, and you put $5,000 into Belgian Corn Futures because you think you could make a lot of money, you’re probably not a Gambler. If you lose that $5,000, you won’t notice it. If, on the other hand, all your retirement money is at risk on any given day, you’ve got a problem. It may not be an “I’m going to gamble all my money away and commit suicide” problem - but it is a problem for having a healthy retirement.
Why? Because the point of retirement funds is to be stodgy and conservative with them. You aren’t trying to make yourself rich - you’re trying to set yourself up so you can stop working for the rest of your life, keep your current income, and not have to worry about your finances anymore. You might be saying, “But I can make so much more money in risky investment X! I can retire much more quickly! That’s the goal anyway, right?” True, you COULD retire more quickly. But you could also lose all your money. Whatever you call it, you’re GAMBLING. You’re risking your current retirement funds in the hope that you’ll make a lot more money. Whereas if you just put a set amount away each month into something conservative, over time you’d have a guaranteed healthy retirement. If you lose all your retirement money at age 40, you’ve got to start over - and you lose the benefit of compounding, which is the “guarantee.” Anyone who is willing to give up a certain, satisfying retirement that will take some time in favor of a risk of complete destitution in old age coupled with a chance of retiring sooner has a problem they need to address.
If you’re concerned you might be a Compulsive Gambler with your retirement funds, I’d ask these questions of yourself:
1) Do I get a “high” when I make money in my investments? Do I care more about this high than my long term progress?
2) Are my investments risky? How much could I lose as a percentage of my portfolio if everything went wrong?
3) Do I have a backup plan, or am I relying entirely on riskier investments?
If you think you’re a Compulsive Gambler, then you’ve got a couple of things you can do. First of all, if you’re actually gambling in the traditional sense (and not just with your retirement investments), then it’s probably more serious. You really shouldn’t be gambling any amount of money that you can’t afford to lose. It’s not a good idea generally for your finances anyway, but if you set aside $500, consider it blown, and go take a vacation to Vegas, then it’s not really a problem. If you’re doing it every week, you should get help if it starts causing problems in your life. I’d go look at the National Council on Problem Gambling’s page on helping people with gambling issues.
What if you only gamble with your investments? Often this doesn’t actually cause problems in your life in the same way as playing the slots every day would. It’s less of a day-to-day problem and more of a long term one, in that you’re risking your retirement. Here’s a few suggestions:
1) It can’t hurt you to try the same counseling programs that gamblers take if you think it’s serious. In fact, it might be necessary if you can’t control it. Would you rather have no retirement funds or have to go to some meetings you don’t like?
2) Put your money out of your hands. If you’ve got a spouse or partner, put them in charge of it - with instructions to stick the money into an index fund or something conservative. Get a financial advisor and have them manage your portfolio. Set a strict rule against buying individual stocks or investments, and only go with funds of various kinds. Any of these can work if you’ve got discipline - and if you’ve only got a minor problem, they could be enough.
3) Limit it to a certain percentage of your money - say 5%. You can put that into riskier buys, but if you lose it, it’s gone and stays gone. Put it in a separate borkerage account. 5% of your money saved each month can go to the riskier investments, while the rest goes to the traditional portfolio.
Some of this advice is imperfect because many people who have a problem with risk-taking won’t admit it - and even if they do, it can be a genuine addiction that is hard to overcome with self-discipline alone. You might be a family member trying to help someone else - in that case, you need to consider it just as if the person had a gambling problem. The roots of gambling on slots or on stocks are the same - the emotional high. The same cause needs the same solution, so if you’ve got a family member who is blowing money on pork bellies, just pretend they were going to the casino every week and check out the various online resources available to deal with family members who have gambling problems. There’s a very good list of them here.
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