Posted 24.05.2021 in Investment Planning
It’s one of those lazy Sunday afternoons, and my 10-year-old charges into the room with Monopoly in her hand. My memory of the game is that it never ends, so even before she asked, I was ready to say no.
It seems that my daughter is, however, a master negotiator. She wasn’t going to take no for an answer.
We spent the next few hours crouched around the board like a pair of gargoyles. While listening to her questions and guiding her through strategies, I recognised many ‘themes’ of Monopoly draw comparisons to the world of investing. How I explained these strategies even resembled how I would summarize an investment approach to a client with limited market knowledge.
Three things Monopoly can teach us about investing:
You can only afford to leave money in the bank if you own the bank (and all the cash in it).
The bank in the game does not give you any interest – similar to our banks in the current low-interest-rate environment. However, as you and your fellow players progress through the game, you are required to pay rent, pay fines, pay bills and live life! All these outgoings require your capital to grow, and in the absence of interest rates, you need to ensure the capital you have is working for you. Therefore, for most investors, achieving all their goals will require investing their capital appropriately rather than leaving it in cash.
Don’t spend it all!
Almost as a contradiction to the point above, it’s also important to ensure that you have a sufficient cash buffer. It’s tempting to keep buying land/houses/hotels in Monopoly (or shares or bitcoin or anything in the real world) to get a higher return. However, running out of cash results in selling those same assets at a time/price that may not be right for you. The global financial crisis taught us all a lot about having some buffer in cash or fixed interest assets so that your growth investments (such as shares and property) aren’t sold at inappropriate times. A cash buffer to cover you for the short term is a smart move.
You may have multiple sets of properties, but can you plan where to build the houses / the hotels? Of course! Like in Monopoly, where you can look at the rental returns (therefore rely on evidence) on the property title deeds to determine where to build, investing your lifelong savings should also be done based on evidence. Some simple rules to follow:
- Over the long term, equity investments should deliver a better return than cash interest, so you know where the spare funds (after you have set aside a buffer) should go to.
- Having all your capital in a handful of shares is a stressful, volatile strategy – avoid it. Diversify across the board.
A bit like reading the rules that should be abided by when playing Monopoly, it would be handy to have a “set of rules” to rely on when thinking all things money and investment. David Andrew, our CEO, simplifies the investment concepts in his book Wealth With Purpose – a simple read whether you are new to the journey or would do with a gentle reminder on how we see the investment world.
I hope this Monopoly comparison reinforces that we participate in basic acts of investing more often than we think.
Here’s to hoping that my daughter learnt some lessons in patience and finance.