Sunday, August 26, 2007

Smart Money: Lessons I learned in Vegas

I had heard about a man who went to Las Vegas and bet everything he had (around $100,000) on one spin of the roulette table. He played red and won. He instantly doubled his money. I went to Vegas and I played roulette. I quickly started losing large sums of money (to me). I was playing at $10 minimum tables but I was betting $50 at a time. I soon found myself down several hundred dollars. I decided to quit for a while. I went and visited the sites.

I kept thinking that I could make it all up at once with one quick streak, betting big dollars. However, later that night, I started thinking about how I invest in mutual funds by dollar cost averaging. I don't buy at the lowest price of the month for the fund nor do I buy at the highest price. I get the average of the month. I decided to play roulette that way. I would bet $10 per bet and I would go with as close to 50/50 odds that I could get. I would bet either red or black. I started winning.

I bought in for $40. I only kept out $20 worth of chips. They were $5 chips. Every time I won, I put the $10 in my pocket. I was winning enough that I stayed in the game for several hours. By the time I left the table and cashed in my chips, I had almost recovered all of my losses from earlier.

How does this relate to dollar cost averaging? Simple. With dollar cost averaging, you are not taking the biggest risk (trying to time the market when the price is at it's lowest) so you may not get the largest return. But you are not buying at the highest price either, which, if things go down in the fund, means you lose the most. Dollar cost averaging will allow you to stay in the game long enough to win. And, over time, with dollar cost averaging, you can reduce your cost basis and risk allowing you to earn more interest on your money.

So next time you hear about the get rich quick gambler, remember, the person who invests the most consistently over time will be the real winner. Also remember there are minimum bets on a table for a reason.  Trust me. Use them to stay in the game.