Are you a pro at Monopoly? The game has many similarities to building your own portfolio of stocks. Your Monopoly experience might just help you better manage your investment portfolio.
Here’s how you can apply your Monopoly knowledge to the real world.
#1 Diversifying Your Portfolio
It is not wise to only have all the expensive or cheap houses available in Monopoly. Although it is important to snatch up the valuable properties when available, you need to invest in utilities and train stations as well.
Likewise, you’ll need a well-diversified portfolio to help reduce your risk. It is important to invest in different industries, countries, sectors, and company sizes. You need to buy stocks that have low correlation. Never put your eggs in one basket.
#2 You Win Some, You Lose Some
When you land on other peoples’ property, you have to pay rent. Likewise, when they land on your property, you collect rent.
Your portfolio follows the ups and downs in the market. You win some, you lose some, depending on the market situation as well as your stock selection.
In monopoly we try to strategise the best way to earn money from rent. It is wise to concentrate on a few major property sets (“colour groups”) to build houses and even better – hotels. The rent you get with each house/hotel built is more substantial than the basic rent you get when you spread your properties across different property sets.
Spreading your risk is necessary and beneficial for your portfolio. However, there is an issue of over-diversification. Buying 30 different stocks isn’t good diversification. The gains in some stocks might be offset by the losses in other stocks. You need to make sure you diversify well.
#3 Dividends Are Your $200 When You Pass ‘GO’
Everyone can’t wait to pass ‘GO’ on the Monopoly board to get that $200. We can’t wait to see the money we get from dividends in our bank accounts.
You get dividends from some of the stocks you invest in. Dividends are payouts given periodically to shareholders by the companies you’ve invested in. The amount of money you get from dividends depends on the stock’s dividend yield. Investors that are aiming to generate a steady cash flow tend to focus on stocks that give dividends.
The money for dividends comes from the company’s profits or reserves. However, not all companies give dividend payouts, even if they are doing very well. Some companies choose to use the profits for the company’s growth.
#4 Tough Luck
Sometimes in Monopoly, you roll the dice and you…end up in “Jail”. Sometimes you lose a massive sum of money when your stock price plunges. Lady luck doesn’t always shine on your side.
You wish you could just pay the $50 to exit jail instead of wasting a few turns trying to roll a double. You wish you let go of the stock earlier before the share price dropped even further.
You can’t always foresee events that will cause your share price to fall. The market is unpredictable for the most part, and we can only mitigate our losses. A good way would be to set a stop-loss just like how the Monopoly rules require you to pay $50 to leave jail after your second unsuccessful roll. This prevents you from losing more money and gives you an idea of when to jump from your sinking ship.
The hours you’ve spent playing Monopoly managing your finances and assets might just come in handy when you look at your investment portfolio strategy.
Top Image Credit: DollarsAndSense.sg
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