People who’ve never invested before oftentimes question the difference between investing and gambling. It’s true both involve risking capital in hopes of making a profit, however, the similarities end there. It would be a mistake to believe otherwise. Here are 3 reasons why investing is not gambling.
3 Reasons Investing Is Not Gambling
Investing involves ownership of something tangible
When an investor buys a stock, they are buying ownership in a public company. It’s true that no investment is ever guaranteed. However, I think we can all agree it’s significantly more likely you’ll receive a dividend payment from Apple than hit the jackpot.
Gamblers own nothing of value through gambling. They simply wager their money based on chance in hopes of winning a payout.
Time is beneficial to an investor
The more time a gambler spends in a casino the more likely they are to lose. The law of averages dictates so. According to the wizard of odds, a gambler playing perfect blackjack has a 46.36% chance of winning. The longer the gambler remains at the table the more likely they will revert to the average and the casino will win. For example, the more times you flip a coin the more likely the outcome will get closer to 50% heads and 50% tails.
The OPPOSITE is true for an investor. Compound interest benefits investors the longer they remain invested. You’ve probably heard the question; would you rather receive $1,000,000 today or a penny doubled every day for thirty days?
If you chose the latter, after thirty days you’d have $5,368,709 vs $1,000,000. That’s quite a significant difference and demonstrates the power of compound interest. Time works against a gambler, and for an investor.
Risk can be controlled by an investor
Unlike gambling, an investor can control the amount of risk they are taking with their portfolio. There are multiple strategies an investor can use to control risk. These include but are not limited to the following;
- Diversification: owning several different securities in a portfolio can significantly reduce risk when compared to owning just one or a few. Non-correlated assets that react differently to market events will reduce volatility, and thus reduce risk.
- Re-balancing: through selling investments that have grown to represent a larger portion of a portfolio and repositioning the proceeds to buy investments that have underperformed, an investor automates the strategy of buying high and selling low. This also maintains the risk parameters the portfolio was originally intended to have.
- Position sizing: penny stocks are significantly more risky than large-cap stocks. An investor can be selective in how much they invest in large-cap stocks, a given sector, or even penny stocks.
- Stop-loss orders: if an investor wants to sell a stock at a certain price if it loses value, they can protect the investment by entering a stop-loss order. For example, if an investor bought a stock at $60, and entered a stop-loss order at $50, the order would execute a sell if the stock were to fall below $50.
As a gambler, the house sets the level of risk for you. Slot machines, blackjack, and roulette, all have preset percentages that favor the casino to win. A disciplined, educated investor or financial professional can control the amount of risk, and thus increase their chances of earning a return.
Don’t let fear of losing money, keep you from investing. Investing and gambling are nothing alike. The more you educate yourself as an investor the more clearly that becomes. Whether you’re a conservative or aggressive investor, it’s essential to grow money over time to combat inflation and realistically achieve long-term financial goals.
Do you feel your risk tolerance as an investor coincides with what you’re willing to wager at the casino?
Levi Sanchez is a CERTIFIED FINANCIAL PLANNER™, BEHAVIORAL FINANCIAL ADVISOR™ and Co-Founder of Millennial Wealth, a fee-only financial planning firm for young professionals and tech industry employees. He is an avid sports fan, personal finance and investing geek, and enjoys a great TV show or movie. His mission is to help educate his generation about better money habits and provide financial planning services to those who want to start planning for their future today!