This is a question I was asked and thought it was worth writing about. (Although I must admit it was much more challenging to answer than I originally thought.)
There are some similarities between investing and gambling but overall I do not view investing the same as gambling. Although I must admit it can feel the same depending on HOW you are investing.
I expect that someone who views investing and gambling as the same has not had a positive experience with their investments. That is a shame and putting investing in a negative light.
Gambling is defined as “playing games of chance for money; betting” or “taking risky action in the hope of a desired result.”
Investing is defined as “expending money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property, or by using it to develop a commercial venture.”
What are the similarities between investing and gambling?
Both involve risk. Both involve chance and unknowns. Both are hoping for a positive or desired result.
What is risk? Risk is the probability or threat of loss. Yes, you can lose money when you invest or when you gamble, but to me, investing is not a game.
An objective of both gambling and investing is to minimize risk and maximize rewards or profits.
Both are helped with information and research.
So, how are they different?
With gambling there is a definite end. There is a win or a loss. Investing only has an “end” if you define it that way. Time keeps going and investments generally do not have a designated specific ending point.
With gambling there is no way to limit your losses. You don’t “partially” win or partially lose with gambling. You can limit the amount you are putting at risk but you lose it all or you can win a certain amount.
With investing you can partially win. It is not usually an all or nothing result. With investing there are many different ways to mitigate your losses. You can put a stop loss on an investment so that if it goes down by a certain amount you can “get out” and only lose that designated amount and keep the rest. You can diversify and invest in many different things so that you are decreasing your risk and increasing your chances that you will have some winners that hopefully outweigh the losers.
To me, the most important difference is that with gambling the house has the advantage. The odds are stacked against you in the long term. Yes, you may win but the house knows it will make a profit over the long term. It is set up that way. Even with sports betting the collective knowledge is amazingly accurate over the long term.
With investments if you invest for the long term, you have the advantage. If you look at the stock market over the long term, it has an upward trend. Yes, over certain time periods investments may go down but the longer the time horizon the more obvious and consistent a positive gain there is. I love looking at this kind of data: https://www.thebalance.com/rolling-index-returns-1973-mid-2009-4061795
This shows that since 1973 there has not been a rolling 15 year negative return period for the S&P 500 Index. There was a 10 year rolling return that lost 3%. The S&P 500 Index’s worst fifteen-year return was 3.7% a year for the fifteen years ending in August 2015. (The worst 20 year rolling return for the S&P500 was 6.4%). The best fifteen-year return was 20% a year for the fifteen years ending in July 1997. The shorter the time period the bigger the swings in ups and downs but if you are patient and are investing for more than 15 years, the odds are greatly stacked in your favor for a positive return on your money. Those odds are the opposite of gambling.
The shorter the time period of your investments the more it may feel like gambling. For those who day trade or are not diversifying their investments (and risk) the more it may feel like a game and gambling.
What I like about investing is that there are many ways to decrease your risk – diversification is a biggie. But my favorite thing about investing is that you are almost guaranteed a positive result, having more than you originally put in, if you stay invested long enough with a diversified portfolio. Both of these aspects are so different than gambling. Personally, I do not like to gamble but investing is a wise thing to do for yourself and your future and something I highly recommend.
If you would like some help with your investments, please give me a call.
Wishing you the best,
Tara
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