5 Lessons Monopoly Teaches Us About Finance And Investing

Monopoly has been a classic board game for over 100 years. It's a real estate trading game that nearly everyone plays for fun and a chance to be a pretend real estate tycoon. But if you've played Monopoly long enough, you quickly realize that the game offers a lot of financial wisdom and lessons that can be applied to the real world of finance and investing. Below are five valuable lessons that not only help you increase your chances of winning the board game, but also increase your chances of having a better and useful understanding of prudent financial and investment principles.

Lesson One - Always Keep Cash on Hand
By far, this is perhaps the most important lesson in the both the game and the financial world. To win in Monopoly you have to the be last player left, in other words, the last one to have money. So if you aimlessly move around the Monopoly board buying up everything in sight, when the time comes to pay your financial obligations, you are likely to run out of cash. No cash means you have to start selling off the properties (assets) you acquired at a deep discount to what you paid for them. In the game, you are allowed to mortgage them at a discount to face value. Once this process happens, unless you get lucky, it's only a matter of time before you go bankrupt.

The same exact principle applies in real-world financial matters. The United States got a front row seat to the consequences that occurred during the recession when cash is not available. When the Great Recession hit, people had been spending cash like crazy, thanks to an addiction to credit. Yet when the housing market went bust and the U.S. banking crisis erupted, those without cash were decimated. The Monopoly effect took place: without cash, folks had to "sell-off" what they owned at steep discounts. Unable to make mortgage payments, people were forced to sell their houses for significantly less than what they paid for them, or worse, the lender foreclosed on the property. Any equity was wiped out.

The same consequences were suffered in the stock market to a staggering degree. When the credit markets seized, many investors scrambled to raise cash. The only option they had was to sell securities at any price. This need for cash created an avalanche of selling that created the huge market decline in 2008 and ultimately led to good, hardworking people losing most, if not all, of their investable assets. On the other hand, the people who had cash were given an opportunity to buy assets - stocks, real estate, bonds - for fractions of what they were worth and, in the end, they won the game and made the most money.

Lesson Two - Be Patient
To win at Monopoly you have to be patient and have a game plan. You just can't win by buying every piece of real estate you land on; you have to have a general approach of how you want to proceed. If you are impatient and start buying every piece on the board you land on, you will quickly find yourself out of money and, thus, unable to do anything but hope for the best. Therefore, you have to be patient and know when to buy and when to take a pass.

Similarly, if you just buy without discipline when investing, you will be placing your outcome on the hope that the market behaves nicely. Successful investors don't invest based on hope, they invest with a disciplined approach. Patience is a very integral part of that approach.

During the Internet boom of the late 1990s Warren Buffett was ridiculed for not investing in Internet companies while speculators around him were capturing triple-digit gains. A lucky few got in and out at just the right time; however, for the vast majority, the result was painful losses. Buffett exercised patience for years while everyone else was chasing Internet stocks. In the end when the market and investors ran out of money, the bottom came crashing quickly, wiping out the majority of investors who weren't patient and disciplined enough.

Lesson Three - Focus on Cash Flow
Monopoly is a simple game: you start off with some money and your goal is to be the last player standing with money. The way you win in Monopoly is by collecting rents on property, or cash flow. Not many people know this, but the most valuable properties on the Monopoly board, with the best cash flow, are the four railroads; if you can own all four of them, you have put yourself in a very good position. With each railroad costing $200, by owning all four you collect $200 in rent or a 25% return. I realize this may be a very bizarre way to look at a game, but this is precisely why Monopoly offers some valuable financial and investing lessons.

Over time, assets increase in value based the cash flows they produce. Even something as simple as a savings account or savings bond becomes more valuable if it earning more cash, i.e., a higher interest rate. In investing, the most successful investments come from those companies that can generate growing cash flows. Iconic companies like Coca-Cola, Johnson & Johnson and IBM have been highly successful investments for decades because of the growth in cash flows.

Lesson Four - the Most Expensive Asset Is Not Always the Best
Most monopoly players want to own Park Place and Boardwalk since they have the biggest payouts. But they are also the most expensive pieces to maintain. Many people lose at Monopoly by owning the most expensive pieces because they don't pay attention to cost, only cash flow. Focusing on the cash flow without taking into account the cost paid to attain those cash flows is to play the game with blinders on.

Those who win at Monopoly, and investing in the long run, instead focus on the value gained for price paid. In investing, the best investments can often be tarnished companies trading at a bargain price. Owning Boardwalk and Park Place is not how you win at Monopoly; you win by making the most money. In investing you win by buying low and selling high. When you focus on the most expensive assets, odds are you are overpaying and setting yourself up for losses.

Lesson Five - Don't Put All Your Eggs in One Basket
You won't win much in Monopoly by just owning one property on the board and loading it up with hotels. It's also hard to win if you try and buy everything on the board and spread yourself too thin. Occasionally you can get lucky and have every opponent land on your property, but usually the winner is someone who spreads out his or her properties throughout the board and has multiple chances at capturing rents.

The same principle applies in investing. If you bet everything on one or two stocks, you are exposing yourself to a potential wipe out if something goes wrong. At the same time, you can dilute your gains by trying to own 100 different stocks. Diversify intelligently - studies have shown that a portfolio gains no additional diversification benefits after 15 to 20 securities. So don't just bet on one or two assets or try and keep up with 50 assets.

The Bottom Line
Of course, a board game like Monopoly shouldn't be taken as a thorough education in finance and investing, as it certainly has it's flaws. However, it does have some valuable lessons to teach, such as to spread yourself out across the board intelligently, keep cash on hand, focus on cash flows, be patient and pay attention to price. Use these five lessons as a guide post to more intelligent and successful investment decisions.



More From Investopedia

--

Get stories like this on the Yahoo app and discover more every day.
Download it now.
Loading...
  • UBS CEO says clients remained risk averse in third quarter Reuters - 13 minutes ago

    ZURICH (Reuters) - UBS (UBSG.S) Chief Executive Sergio Ermotti said on Thursday political uncertainty and concerns over global growth meant clients remained cautious about the market in the third quarter. ... … More »

  • Chinatown shophouses for sale at $23 mil
    Chinatown shophouses for sale at $23 mil The Edge Property - 18 minutes ago

    A pair of shophouses at 22 and 23 Mosque Street have been put up for sale by expression of interest. The indicative guide price for 22 and 23 Mosque Street is in the region of $23 million, which translates to about $2,950 psf on the existing gross … More »

  • From robots to websites, British firms curb spending due to Brexit Reuters - 21 minutes ago

    Heavy machinery whirrs and clanks on the factory floor of precision metalworking firm Robert Bion & Co, where a planned three-metre robotic arm would have been speeding up output by now, if Britain had not voted to leave the European Union. "We're … More »

  • Bank of Finland cuts Europe growth forecasts on Brexit, Italy problems Reuters - 22 minutes ago

    Finland's central bank cut on Thursday its forecast for economic growth in Europe for next year, citing impacts from Britain's vote to leave the EU as well as weakened economic prospects in Italy. The Bank of Finland slightly lifted its 2016 growth … More »

  • Planned global banking rules not balanced, need changes - EU's Dombrovskis
    Planned global banking rules not balanced, need changes - EU's Dombrovskis Reuters - 41 minutes ago

    A planned reform of global banking rules being discussed by the United States, Europe, Japan and other major economies risks negatively affecting European banks and needs to be changed, the EU financial services commissioner said on Thursday. The … More »

  • Mount Anvil to preview Hampstead Manor in Singapore
    Mount Anvil to preview Hampstead Manor in Singapore The Edge Property - 42 minutes ago

    Award-winning London developer Mount Anvil will launch for sale its latest development, Hampstead Manor, in Singapore at the Four Seasons Hotel over the weekend of Oct 1 and 2. Knight Frank has been appointed the marketing agent for the project. … More »

  • Bugis Point on the market for $59.5 mil
    Bugis Point on the market for $59.5 mil The Edge Property - 48 minutes ago

    Bugis Point, a six-storey commercial building at 530 North Bridge Road, has been put up for sale by public tender. According to CBRE, the appointed marketing agent, the property has a guide price of $59.5 million. Bugis Point is located directly … More »

  • Billionaire Li Takes Long-Term Bet on Newly Listed Postal Bank Bloomberg - 49 minutes ago

    The chairman of CK Hutchison Holdings Ltd., his three charitable foundations and his son Victor Li, hold a combined 11.62 percent of H-shares in the Chinese lender, according to an e-mailed statement Thursday. Postal Bank raised $7.4 billion in its … More »

  • Amoy Street shophouses up for sale
    Amoy Street shophouses up for sale The Edge Property - 53 minutes ago

    Adjoining shophouses at 77, 78, 79 and 80 Amoy Street have been put up for sale by public tender. According to CBRE, the properties have a guide price of $64.3 million, or $2,700 psf, based on the gross floor area. This is the second time CBRE has … More »

  • Gold pares gains as dollar recovers, equities rally
    Gold pares gains as dollar recovers, equities rally Reuters - 58 minutes ago

    Gold pared early gains on Thursday as the U.S. dollar recovered and global stocks rallied after oil producers agreed to curb output. The Organization of Petroleum Exporting Countries on Wednesday agreed modest oil output cuts in the first such deal … More »

  • Cash freeze squeezes Italy migrant centres to bursting point
    Cash freeze squeezes Italy migrant centres to bursting point AFP News - 59 minutes ago

    A steady flow of migrants arriving in the south has combined with the de facto closure of borders to the north to leave Italy's migrant reception centres bursting at the seams. Neither Renzi's office nor the finance ministry responded to an … More »

  • Expert panel warns Tokyo Olympics cost could top $30 billion
    Expert panel warns Tokyo Olympics cost could top $30 billion Associated Press - 1 hour 0 minutes ago

    An expert panel commissioned by Japan's capital city has warned that the total cost for the Tokyo 2020 Olympics could exceed 3 trillion yen ($30 billion) unless drastic cost-cutting measures are taken. ... … More »

  • Did landmark laws from Congress enable high drug prices?
    Did landmark laws from Congress enable high drug prices? Associated Press - 1 hour 0 minutes ago

    Lawmakers are venting outrage over high prescription drug costs, but if Congress is looking for culprits, it might want to look in the mirror. Republican- and Democratic-controlled Congresses, and presidents ... … More »

  • Three residential buildings near Orchard Road, two The Claymore units up for sale
    Three residential buildings near Orchard Road, two The Claymore units up for sale The Edge Property - 1 hour 1 minute ago

    A group of investment holding companies has placed three residential properties near Orchard Road up for sale by public tender. The three properties are 3 Cuscaden Walk, 120 Grange Road and 8 Hullet Road. Completed in the early 1990s, 3 Cuscaden … More »

  • China’s Big Ball of Money Isn’t Going Anywhere Near Stocks (2) Bloomberg - 1 hour 3 minutes ago

    The Shanghai Composite Index will end the year at 3,075, according to the median forecast in a Bloomberg poll of 10 strategists and fund managers. That implies a 13 percent drop over the 12-month period, the steepest in five years, and a gain of 2.9 … More »

  • Asia stocks rally, energy firms soar on OPEC deal
    Asia stocks rally, energy firms soar on OPEC deal AFP News - 1 hour 8 minutes ago

    Energy firms led a rally in Asian stock markets Thursday, while high-yielding currencies advanced after OPEC's shock agreement to cut oil output sent crude prices soaring. The gains come after OPEC's "historic" announcement late Wednesday of a deal … More »

  • Governor to approve state-run retirement for private workers
    Governor to approve state-run retirement for private workers Associated Press - 1 hour 9 minutes ago

    Gov. Jerry Brown is scheduled to sign legislation Thursday to automatically enroll nearly 7 million people in a retirement savings account, an attempt to address growing fears that many workers will be ... … More »

  • Bridging the Gap: Hainan summit presents opportunity for Southeast Asian startups to test China
    Bridging the Gap: Hainan summit presents opportunity for Southeast Asian startups to test China e27 - 1 hour 10 minutes ago

    The event takes at Clear Water Bay on the island of Hainan and registration closes tomorrow   It is common knowledge in the startup world that the Chinese tech ecosystem is leading the East Asian region and has risen to rival that of Silicon Valley. … More »

  • 'Mud Men' make rare foray outside Papua New Guinea
    'Mud Men' make rare foray outside Papua New Guinea AFP News - 1 hour 11 minutes ago

    The ghostly dance took place not in their native Komunive village, but at the Australian Museum in Sydney on Thursday. It was their first sojourn outside PNG to share their passion for crafting the "holosa" mud masks -- considered as one of the key … More »

  • TI Fluid Systems to raise 600 million euros in London debut Reuters - 1 hour 11 minutes ago

    The company said the offer would include a partial sale of shares held by funds advised by Bain Capital Private Equity, LP, members of the management team and other individual shareholders. TI Fluid said it would use the net primary proceeds to … More »

  • Gift Ideas for #TeamOffice
    Gift Ideas for #TeamOffice MoneyMax.ph - 1 hour 12 minutes ago

    Office Holiday parties are an eventuality, really. Some will go the Secret Santa route and exchange only one gift on the day of the party itself, with everyone’s code names and wish lists up on the bulletin board, or sent around via e-mail. Some … More »

  • Senior German lawmaker says no more aid for ailing banks Reuters - 1 hour 13 minutes ago

    Germany will not grant any more state aid for ailing banks, a senior lawmaker in Chancellor Angela Merkel's conservative bloc said on Thursday, a day after the government denied it was working on a rescue plan for Deutsche Bank, its biggest lender. … More »

  • European stocks rally at open after OPEC deal AFP - 1 hour 13 minutes ago

    Europe's main stock markets rallied at the start of trading on Thursday as energy share prices surged following OPEC's surprise deal to cut oil output. London's benchmark FTSE 100 index jumped 1.0 percent ... … More »

  • Cellphones spill into Yellowstone's wilds despite park plan
    Cellphones spill into Yellowstone's wilds despite park plan Associated Press - 1 hour 15 minutes ago

    Adventure seekers encounter untamed wilderness when they enter the backcountry of Yellowstone National Park. Howling wolves. Deadly grizzly bears. Steam-spewing geysers as seen nowhere else on earth. A ... … More »

  • Insight: From robots to websites, British firms curb spending due to Brexit Reuters - 1 hour 19 minutes ago

    Heavy machinery whirrs and clanks on the factory floor of precision metalworking firm Robert Bion & Co, where a planned three-meter robotic arm would have been speeding up output by now, if Britain had not voted to leave the European Union. "We're … More »

 
Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
 
Sign-in to view quotes in your portfolios.

MARKET MOVERS

  • Most Actives
    Most Actives
    NamePriceChange% Chg
    0.159+0.008+5.30%
    N21.SI
    0.114+0.005+4.59%
    40E.SI
    0.29+0.01+5.45%
    5ME.SI
    0.131+0.009+7.38%
    A50.SI
    0.106+0.001+0.95%
    40F.SI
  • % Gainers
    % Gainers
    NamePriceChange% Chg
    0.35+0.05+16.67%
    AYV.SI
    0.13+0.02+16.07%
    BEH.SI
    0.119+0.015+14.42%
    A7S.SI
    0.325+0.032+10.92%
    BJE.SI
    0.395+0.045+12.86%
    BQF.SI
  • % Losers
    % Losers
    NamePriceChange% Chg
    0.178-0.020-10.10%
    M14.SI
    0.21-0.02-8.70%
    BXE.SI
    0.49+0.02+3.16%
    AWC.SI
    0.154-0.013-7.78%
    5WJ.SI
    0.16-0.01-5.88%
    5G1.SI

Market Data

  • Currencies
    Currencies
    NamePriceChange% Chg
    1.3633+0.0044+0.32%
    USDSGD=X
    1.5302+0.0063+0.41%
    EURSGD=X
    1.7740+0.0057+0.32%
    GBPSGD=X
    74.3980+0.286+0.39%
    SGDJPY=X
    5.6863-0.0178-0.31%
    SGDHKD=X
    3.0174-0.0142-0.47%
    SGDMYR=X
    9,512.1279-49.4746-0.52%
    SGDIDR=X
    4.8926-0.0176-0.36%
    SGDCNY=X
    1.0461+0.0015+0.14%
    AUDSGD=X
  • Commodities
    Commodities
    NamePriceChange% Chg
    1,325.50+1.80+0.14%
    GCZ16.CMX
    19.23+0.10+0.54%
    SIZ16.CMX
    95.67+2.69+2.89%
    ^XAU
    2.190.000.00%
    HGZ16.CMX
    43.85+0.41+0.94%
    CLV16.NYM
  • Bonds
    Bonds
    TreasuryYield (%)Yield Change
    1.13+0.02
    ^FVX
    1.57+0.01
    ^TNX
    2.29+0.01
    ^TYX