The economics of investing with house money

The economics of investing with house money

Mind Over Money in practise
Peter Siks

Summary:  When investing there are a number of behavioral finance concepts to be aware of. The house money effect is one, which focuses on the importance of considering how to enter the market with larger sums of money.


Beginning to invest is a big step for everyone, and for many it's something they have considered for a long time. While monthly investment opportunities are becoming increasingly popular, many also decide to start their investment journey only once they have a larger sum of money. 

This sum can be something you have saved up for, or it can be something that you’ve received a little easier or more surprisingly. For instance, a larger bonus than expected, a homerun stock investment or the like. If your lump sum of money has come easier to you than you expected, you should be aware of the house money effect.

House money

House money is a behavioral finance concept where investors risk more with money that was easily obtained. The effect can be compared to winnings from a casino. Let’s say you enter a casino with USD $500. 

After an hour you are up to $1,200, meaning that your profit stands at $700. While you still want to keep the $500, as the night goes on you could end up playing a bit more loosely and risky with your profits, in order to see if you can bring home the “big win”. This behavior is similar to the house money effect, because you feel like you’ve gotten your money pretty easily so you are more willing to put it at risk.

Evening out your odds

When you invest your money there are ways and strategies to improve your chances of long-term success, and that could help you avoid falling into the house money trap. 

Consider the Jones family. Unexpectedly, they receive an inheritance of $50,000. The Jones family's day-to-day finances are healthy. They have $60,000 in savings, the mortgage payments are ahead of schedule, and substantial savings can also be made every month. The inheritance is therefore not necessary to cover the running costs of the family. It can be seen as an unexpected, substantial financial windfall. 

After a number of conversations, the Jones family decides to invest the windfall. The purpose of the investment is extra financial leeway over 20 years so they can enjoy their eventual retirement. The investment time horizon is long.

How to start

Mrs. Jones has been reading a lot about how to start investing. To her it is clear that she does not want a wild adventure. She understands that diversification is a good way to limit risks. She follows her broker’s advice and chooses a globally diversified portfolio. Now she knows what she wants to invest in, the next thing to figure out is exactly how much of the money she should to invest to get started. 

The immediate response for many, including Mrs. Jones, would probably be to invest it all at once, as a lump sum, but that might not be the best approach in this specific situation. The reason for that is that if the Jones’ invest everything immediately, their portfolio will become very sensitive to market movements, relative to that one day when they invested. 

What they could do instead is spread their investment out over e.g. 10 months and invest $5,000 per month. Doing this will make it less important to time the market, as some of it could be invested when markets are down and some when it is up, averaging out the price for the entire investment.

The take away?

If you unexpectedly receive a financial windfall, don’t rush into the market. Take some time to figure out what the right approach is for you and your money. It is human nature to take more risks with unexpected money, whether you are an experienced investor or not. So remember that investing is not a “game” of all or nothing. It is wise to take enough time to build up a diversified portfolio, without trying to time the markets -- perhaps especially when starting with house money. 
 

Quarterly Outlook

01 /

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...

Content disclaimer

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Bank A/S and its entities within the Saxo Bank Group provide execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer and notification on non-independent investment research for more details.
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)


Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region

UAE
UAE

All trading and investing comes with risk, including but not limited to the potential to lose your entire invested amount.

Information on our international website (as selected from the globe drop-down) can be accessed worldwide and relates to Saxo Bank A/S as the parent company of the Saxo Bank Group. Any mention of the Saxo Bank Group refers to the overall organisation, including subsidiaries and branches under Saxo Bank A/S. Client agreements are made with the relevant Saxo entity based on your country of residence and are governed by the applicable laws of that entity's jurisdiction.

Apple and the Apple logo are trademarks of Apple Inc., registered in the US and other countries. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.