It’s easy to banter about “playing the market,” but investing is no game when it’s your money at stake. And yet there is little doubt that people pay a lot of attention to games when money is at stake.
The most visible, long-running example of this may be “The Price Is Right,” the popular game show that will be all over the news as long-time host Bob Barker takes his final bow June 15.
The little competitions are not so dissimilar from real-life investing, where consumers are confronted with a variety of market, economic and personal conditions that they must account for to win the savings game and capture the ultimate prize of lifetime financial security.
This column will look at some classic “Price Is Right” games today and again next week, showing how a little tweak turns a game-show’s pricing contest into an investor’s money-management challenge.
The Bargain Game: On “Price Is Right,” the contestant is playing for two prizes, and sees a price that is less than the actual retail value on each. The contestant wins by correctly discerning which item is the better “bargain.”
In mutual funds, investors looking to buy a fund ultimately should boil their picks down to a select few, and then go bargain hunting. That means examining a side-by-side description of the funds to see how they intend to accomplish their investment objective.
If two funds take the same strategy, the better bargain is clearly the fund with the lowest expense ratio; if they take different strategies in the same asset class, picking the better bargain will mean balancing any additional costs against an expectation of higher returns. If a fund can’t convince you that it can deliver more for your money, it’s no bargain compared to a lower-cost competitor.
Triple Play: An old favorite, this game is played for three cars on “Price Is Right,” and features three games within a single contest. Win all three games, win all three cars; lose one, get nothing. Each successive contest involves picking the right price from among a growing number of wrong ones.
In mutual funds, Triple Play is all about building a portfolio, because it’s not enough to pick one good fund. The idea is to hit the big prize – a fund you can count on, that can deliver to your expectations – in several different asset classes.
The first fund tends to be easy – because it’s a broad, safe choice with the fewest chances to go wrong – but expanding your holdings into sectors, international stocks and more makes subsequent choices more difficult. To win, an investor must own several high-quality funds that move independently, so that a market nose dive doesn’t do permanent damage and scare the investor to dump the whole thing.
That’s Too Much: Played for a car on the game show, Barker shows the contestant up to 10 prices, one at a time, from lowest to highest. The contestant shouts “That’s too much!” upon seeing the first price he thinks is too high; if the answer’s correct, he or she wins.
In mutual funds, this is a contest investors should play when looking at a fund’s expense ratio, and they can win if they remember one simple playing hint. For a stock fund, the “too much” number is 1.25 percent; for a bond fund, it’s 0.75 percent.
Take Two: The “Price Is Right” contestant is given a dollar figure and must choose two of the four items where prices total the target amount in order to win all of the prizes.
In fund investing, the dollar target is the amount needed to be “set for life,” to achieve the ultimate goal of lifetime financial security.
Investors should determine the amount needed to actually reach their goals. If the funds can’t deliver, investment and/or savings habits most likely need to be changed or the game may be lost.
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at jaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.
